Wider political debate shouldn’t overshadow progress on devolved taxes

29 May 2013

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Ramping up communications around the Land & Buildings Transaction Tax (LBTT) will help demonstrate the Scottish Government’s credentials in devolved taxation, according to a new report published by EY in association with the Royal Institution of Chartered Surveyors (RICS) Scotland.

The report – the latest in the professional services firm’s Grasping the Thistle series – suggests there is a relatively low level of understanding of LBTT among Scotland’s business community despite it being at an advanced stage of development.

Of the senior business figures polled as part of the paper, less than half (44%) said they were ‘aware’ or ‘very aware’ of the tax, which will replace Stamp Duty Land Tax (SDLT) under powers granted to the Scottish Parliament by the Scotland Act 2012.

Paul Gallagher, tax partner and head of EY Scotland’s Government & Public Sector practice, said: “A concerted programme of communication is needed to boost awareness of LBTT, its progressive structure and the potential benefits it can bring to Scotland’s economy and property market.”

Highlighting the impact the new tax can have on business decisions, one respondent said: “The rate of LBTT will be a factor in influencing as to where to locate new or existing operations.”

Band and rates should be set early to avoid market upheaval

LBTT will be enacted into law this summer, with an announcement regarding bands and rates likely to be made prior to September 2014. The new tax will then be introduced in April 2015.

The tax will be levied on outright purchases of land and buildings, grants of new leases, assignations of existing leases and other land-based transactions.

If the tax is introduced on a ‘revenue-neutral’ basis, it is likely that LBTT will be less than SDLT on lower-value transactions, but higher than SDLT on higher-value transactions. To limit any negative impact on businesses in Scotland, The Scottish Government has indicated that a lower top rate will apply for non-residential property than for residential.

Sarah Speirs, director at RICS Scotland, urged the Scottish Government to set rates at its earliest possible convenience, but also advised it to err on the side of caution when determining thresholds.

“Consideration should be given to knock-on effect any delay in announcing LBTT thresholds could have on investor confidence, especially where non-residential property is concerned, and, ultimately, the potential damage to Scotland’s economy. The lead-in time for the introduction of the new tax has to provide an adequate amount of preparation time without distorting the market.

“From a residential perspective, house buyers may delay or accelerate a purchase depending on whether the new property band and rate would be of benefit to them. The Scottish Government has to strike a balance in getting first-time buyers on to the property ladder, whilst maintaining investment at the higher end of the market.”

According to one survey respondent “it is impossible to make a balanced comment on LBTT given the absence of information on rate applicable. The uncertainty is neither helpful nor desirable. It is a bit like being asked to get best-value shopping when prices aren’t on display.”

Paul Gallagher added: “The timing of the announcements on bands and rates will require careful judgement and there is an argument for bringing them forward. They certainly shouldn’t be delayed beyond the current target date of September 2014, irrespective of the wider political debate.”

Combating avoidance demonstrates strength and garners respect

Unsurprisingly, given the ongoing public debate on tax avoidance, almost four out of five (78%) of those surveyed for the report supported the introduction of a General Anti-Avoidance Rule (GAAR) covering the devolved tax.

The Scottish Government recognises that some of the worst examples of abusive tax planning have taken place in relations to SDLT, and has intimated that it is determined to avoid similar abuses of the LBTT regime.

Paul Gallagher concluded: “Businesses recognise LBTT as an opportunity to create a distinctly Scottish tax that is specifically geared towards the country’s needs. Creating legislation that deters and defeats abuse of the system while providing businesses with the flexibility required in a difficult economic environment will support Scotland’s recovery.”