Are you a tenant with a Commercial Lease in Scotland? You may have to submit a tax return
From 1 April 2018, certain tenants of non-residential or commercial leases in Scotland must submit a tax return – a lease review return – to Revenue Scotland, to ensure they have paid the correct amount of Land and Buildings Transaction Tax.
What is Land and Buildings Transaction Tax?
Land and Buildings Transaction Tax (LBTT) is a tax fully devolved to Scotland. It replaced Stamp Duty Land Tax from 1 April 2015 in Scotland, and applies to the purchase of residential and commercial land and buildings located in Scotland. It also applies to non-residential or commercial leases, for example the lease of agricultural land or a factory.
Normally LBTT is payable on the lease and a tax return must be submitted within 30 days of the start of a notifiable lease (the effective date).
Revenue Scotland is the tax authority responsible for the management and collection of taxes fully devolved to Scotland. This currently includes the administration of LBTT and Scottish Landfill Tax (SLfT).
What is the three-year review of leases?
Leases are treated in a different way compared to standard purchases of land and buildings for tax purposes. In most cases, when a purchase is completed, any LBTT is calculated based on the amount paid for the property. In general there is little likelihood that this will change, so the tax position is fixed.
When a lease is entered into, the tax payable is calculated using an estimate of the rent payable over the term of the lease. This is referred to as the Net Present Value or “NPV”.
Leases often continue over a period of years and can be subject to change through, for example, variations, extensions, assignations, rent reviews and tacit relocation. The tax position must therefore be reviewed to take into account any of these changes.
If a lease of commercial property in Scotland falls within the LBTT regime, then the tax position must be reviewed and a further return submitted to Revenue Scotland in the following specific circumstances:
- Every three years from the effective date of the lease;
- On assignation of the lease from one party to another;
- On termination of the lease.
LBTT took effect in Scotland from 1 April 2015, so the first possible three-year review point for leases subject to LBTT was 1 April 2018.
What is the purpose of the review?
The purpose of the review is to ensure that the tax paid accurately reflects the rent payable over the lifetime of the lease by taking into account any changes that have occurred since the lease was entered into or the last review completed.
The lease review return may show that more LBTT is payable. If that is the case, the additional LBTT must be paid when the lease review return is submitted. Alternatively, the return may show no change in the LBTT liability, meaning no further tax is payable. If the return shows that you have paid too much tax, you can claim a repayment through the lease review return.
Note that a lease review return must be submitted every three years, even if there have been no changes to the lease and where no further LBTT is payable.
Who has to submit a lease review return?
The tenant is responsible for submitting the lease review return and also for paying any LBTT due.
What is the deadline for submitting a lease review return?
The return must be submitted, and any LBTT due paid, within 30 days of the date of the three year anniversary or, where applicable, the termination or assignation of the lease. In the case of an assignation, the outgoing tenant must submit the further LBTT return. There are penalties for late submission of the lease review return and for late payment of any LBTT due.
The original lease is agreed and executed on 1 December 2015. The tenant submitted the LBTT return and paid the LBTT that was due.
The effective date of the original transaction was 1 December 2015. The date of the first three-year lease review is therefore 1 December 2018.
The tenant must submit the lease review return no later than 31 December 2018. If there is any LBTT due, the tenant must pay this at the time they submit the lease review return.
How do I work out if there is any LBTT to pay?
You can use Revenue Scotland’s online tax calculator to work out how much LBTT, if any, you need to pay in connection with the lease review.
Before you start, you will need the following information:
- The actual amount of rent paid in each of the years preceding the review date;
- The actual amount of rent payable for each year in the remaining term of the lease;
- The amount of any premium paid on the grant of the lease, plus any additional premiums paid, or to be paid, since the last return was submitted; and
- The amount of tax already paid on the lease.
Further information about calculating tax is available on the Revenue Scotland website.
How can I submit a lease review return?
You can make a return to Revenue Scotland either online or on paper. Revenue Scotland has produced a YouTube video explaining how to complete and submit a lease review return, and guidance is also available providing information about how to make a return either online or on paper.
Revenue Scotland also provides guidance on how to make payment, depending on whether you submit your return online or on paper.
Where can I find more information?
More information about three-yearly lease reviews is available on Revenue Scotland’s website.
This includes worked examples showing how the lease review works when there is more tax payable, less tax payable and no further tax payable.
If you need further assistance, you can contact Revenue Scotland, using the details on its website.