Stamp duty refunds: too good to be true?
Experts warn in this guest blog that some claims being made by firms offering help with SDLT refunds are too good to be true, and urge property buyers to exercise independent judgement before making a claim.
An increasing number of firms are contacting buyers of properties after completion of a purchase, suggesting that stamp duty land tax (SDLT) has been overpaid. The most common issues raised are that multiple dwellings relief (MDR) has not been claimed or that the buyer could have paid non-residential rates of SDLT (which are generally lower than residential rates) because the property was a mixture of residential and non-residential land. Similar issues arise for transactions in Wales and Scotland, which have taxes that are substantially similar to SDLT, but this note only talks to SDLT.
The letter offers to make a reclaim application with HMRC, usually in return for a percentage of the refund. They often say it is "no success, no fee" and that there is little to lose. Typically their letters will include wording such as:
"We send HMRC a detailed and fully documented claim asking them to review your stamp duty payment."
"HMRC will then review a claim as submitted and should it agree with our conclusions, will refund the overpaid SDLT."
"Any rebates of overpaid SDLT are subject to HMRC’s agreement."
"All rebates come with HMRC formal review and approval."
"You have nothing to lose."
"If we cannot convince HMRC that you have overpaid your stamp duty and are due a refund, there will be no charge to you."
"We also indemnify you against any interest and penalties charges that HMRC could make if the amendments we sought were disallowed."
Some letters claim that they "cooperate with HMRC daily to recover refunds."
Taxpayers who receive these unsolicited letters might well want to consider the issues raised in the letter. SDLT is an extremely complicated tax and sometimes SDLT has indeed been overpaid. As an example, with a purchase of a number of flats, MDR might have been missed. MDR can give a reduction in the SDLT, as it allows multiple use of the lower rate bands of SDLT. In such cases an amendment to the land transaction return can be made within 12 months to claim the relief and a repayment of some of the SDLT.
This blog is intended to throw a light on some of the areas where firms suggest refunds are available and to give guidance on some of the points that need to be considered if a letter is received. Whilst some approaches help people recover tax which was overpaid, HMRC report that they consider some claims for refunds as being "surprising". Whilst HMRC will not be correct in all cases, many suggested claims lie within contested areas of law. Despite this, we have seen firms advocating refunds based on contested interpretations of the law with little or no warning as to the risks involved.
2. Process now, check later
Many of the letters we have seen also give the impression, at least to the uninitiated, that receiving a refund from HMRC means that the refund claim has been successful. The claims firms do not always make it clear that HMRC usually operate a “process now, check later" system for amendments to returns; that is, HMRC do not fully consider the claim before making a repayment. This means that receiving a refund does not show that HMRC have approved or agreed the reclaim; they have merely given effect to the taxpayer’s statutory right to change their self-assessment within one year. HMRC recently updated their guidance and now say the following about refunds and their process now / check later approach:
How to apply for a refund
If you think you’ve overpaid SDLT, you can apply for a refund.
To process refunds quickly, HMRC will make the payment without checking eligibility.
This means that even after a repayment has been made, we have not agreed that the refund is due. We have up to 9 months to make a compliance check on your amended return or claim.
If you receive a repayment where the amount you claimed was not due, you must pay it back along with any interest due. If penalties apply, you must also pay them. Read more about penalties.
In addition to the normal 9 month enquiry period, if the claim for a refund does not give full information on the basis on which it has been made, HMRC are also able to make a "discovery assessment" and demand SDLT over a much longer period if they discover that tax has been underpaid. There is a basic period of four years, increased to six years if there was carelessness or to 20 years if the loss of tax was deliberately brought about.
3. Self assessed tax
SDLT is a self-assessed tax, so even when making an amendment to a return, it is the responsibility of the taxpayer to form a reasonable and reasoned opinion of the application of the law to the facts. It is similar to completing an income tax return; the taxpayer is expected to act honestly and not submit a self-assessment which they do not believe to be true. There are risks for self-assessing to a refund when none is due.
It is not usually possible, after completion, to require HMRC to make a decision on the tax liability, although sometimes they decide of their own accord to open an enquiry into an amendment before making a refund. As HMRC say on their sheet "Amendments, refunds and requests for advice after an SDLT return has been submitted":
"SDLT is a self assessed tax. This means that the relevant taxpayer is responsible for making sure they work out and declare the right amount of tax on their SDLT return".
• give advice
• give opinions on the tax treatment of a transaction
• confirm that the return we've received is right"
That puts a burden of responsibility on a taxpayer who wants to claim multiple dwellings relief (or other beneficial tax treatment) either on the original return or by claiming a refund after. Sending HMRC information with the application for a refund does not make HMRC the "judge" of whether the relief or other favourable treatment is due. That means the taxpayer is responsible, even if an agent or other party submits the return or claim.
4. Alternative approach
Generally speaking, if a buyer is considering whether they might have overpaid SDLT, a good starting point is to speak to the conveyancer who handled the transaction for them, or to find a specialist who can give advice.
If there is a good case for seeking a repayment, often the taxpayer can deal with it themselves, or obtain specialist help without having to pay a percentage of the tax saving. A specialist can give impartial advice based on the law and HMRC’s published practice, whereas a claims firm has a conflict of interest: they are financially incentivised to make claims, even claims that are very aggressive.
5 Examples of suggested reclaims
Here are some examples of the kind of approaches we have seen where it is suggested an amendment can be made.
5.1 Multiple dwellings relief
5.1.1 Most common is the suggestion that MDR can be claimed where the property particulars mention the word "annexe" or give an indication that the property contains a granny flat or outbuilding with living accommodation. Buyers can receive letters from more than five companies after completion suggesting a refund is due. There are cases where a property includes an annexe that is fully independent and a claim for MDR is valid. However, this is a highly contested area that depends very much on the facts – we have seen many cases in which it has been suggested that there is a separate annexe based on very tenuous arguments.
There are a number of cases where HMRC's refusal to allow the relief has been appealed to the Tribunals. So far HMRC have won all of the cases. The decisions of the Tribunals provide a useful guide as to how independent different parts of a property need to be in order to count as more than one dwelling. Some guidance can be found in the Upper Tier Tribunal case of Fiander and Brower v HMRC.
HMRC have given guidance on how to assess the number of dwellings in the Manual starting from page SDLTM00410.
5.1.2 When land has been bought with planning permission to build houses, or there are permitted development rights for an existing building to be converted to flats, some claims companies say that it is possible for MDR to be claimed even though physical work had not started by the date of completion of the purchase.
The legal basis for this argument has been rejected in the lead appeal decisions of Ladson Preston Ltd and AKA Developments Greenview Ltd. This is expected to be appealed as there are many similar cases stayed behind the lead appeals.
HMRC confirm their view that physical works are needed at SDLTM00400.
5.1.3 Some claims companies draw attention to the rule that where MDR is claimed for a "mixed use property", the 3% surcharge for additional properties should not apply. This was not always well understood and may have been missed. ("Mixed use property" here refers to a property which includes a mixture of what the SDLT legislation defines as "residential property" and "non-residential property").
|HMRC now accept this analysis in cases where the non-residential element is neither negligible nor artificially contrived and confirm this in the Manual at SDLTM09740.|
However, we have seen claims where the basis for claiming that the property includes non-residential property is highly tenuous (see below on mixed use treatment).
5.2 Mixed use treatment or non-residential property
The rates of SDLT for non-residential or mixed use property are generally lower than for residential property, with the difference being more pronounced for higher value properties, or where the 3% extra SDLT would apply to a residential purchase. We have seen claims that a property is mixed use or non-residential based on minimal non-residential use – we give some examples below.
5.2.1 Some claims companies argue that mixed use treatment can apply where there was a prior option or reservation agreement for the property (common in respect of new build properties).
HMRC do not agree this analysis as is clear from their Manual at SDLTM01300. The High Court has also made critical remarks on the argument made by the claims companies, albeit without needing to determine the issue.
It is understood that dates are awaited for a number of Tribunal cases on this issue (confirmed at the Working Together Stakeholder Group meeting on 29 July 2021).
5.2.2 It seems that some companies obtain details of properties sold with a right to use a communal garden and buyers are contacted and told a refund might be due.
|That argument was rejected in the First Tier Tribunal in Khatoun decision of 12 April 2021.|
5.2.3 Another angle taken by claims companies is that there is something about the property which means the property is not wholly residential, such as:
- The property has woodland, paddocks or fields with it.
- There is an overflying electricity cable.
- There is a public right of way across the property.
- Access is gained to the property over non-residential property.
The definition of "residential property" is a wide one, bringing in the "garden or grounds" of a dwelling. HMRC have issued guidance on what counts as "garden or grounds" in the Manual starting from SDLTM00440.
There have been a number of Tribunal cases on the issue, all of which HMRC have won. The leading case is the Upper Tier Tribunal decision in the combined appeals in Hyman Pensfold and Goodfellow.
5.2.4 A building which is so derelict as not to be "suitable for use as a dwelling" might benefit from the lower rates of SDLT applicable to non-residential property. This follows a Tribunal decision in the P N Bewley Ltd case.
HMRC deal with the issue in their Manual at SDLTM00385 It is clear that their view is that very few properties are so derelict as not to count as a dwelling.
See also the decision of the First Tier Tribunal in Fish Homes Ltd v HMRC which held that a flat with defective cladding was a "dwelling".
5.3 Fixtures, Fittings and Chattels
One firm writes to buyers of high value properties suggesting that a large sum could be apportioned to fixtures, fittings and chattels and that up to 15% of the SDLT could be reclaimed.
A letter contained these misleading comments: "Stamp duty is only paid on land and buildings, not on fittings." "If you didn't deduct the fittings, or you used their secondhand value, you probably paid too much stamp duty". The term "fittings" can encompass a wide range of items ranging from loose items of furniture and fittings that are built into the property. Once a "fitting" is affixed to the property, it is likely that it will be treated as part of the property and subject to SDLT.
It is true that a reasonable sum apportioned to "chattels" (generally loose items) does properly escape SDLT, but this is not the case for fixtures, see HMRC's Manual at SDLTM04010.
The issues were considered in the 2012 Tribunal case of Orsman v HMRC.
6. Quote from HMRC
Asked to comment on these issues, HMRC said:
“HMRC has seen some very surprising claims for repayment of overpaid SDLT, often made by agents acting for people who bought their property some time ago.
"When people amend their return to include multiple dwellings relief this results in a claim for a tax refund, but that does not mean HMRC agrees that the refund is due. ‘Process now, check later’ procedures mean HMRC can, and does, check claims even after the refund has been made and the agent has received their fee. Where the claim is wrong, the purchaser is not only liable to pay back all the tax that was refunded, with interest, they may also have to pay a penalty of up to 100% of the tax refund. HMRC has a high success-rate in litigating questionable MDR claims.”
SDLT is complicated and sometimes reliefs are overlooked, so it can be worth revisiting transactions if a letter is received.
However, many unsolicited approaches are indeed "too good to be true" and responsible taxpayers should act with caution and check independently whether a refund is due.
The suggested fee arrangements can also seem attractive as it appears that the claims are made on a "no win – no fee" basis. But it is important to remember that receiving a refund is not necessarily a "win" – as HMRC may revisit the claim and deny that it was valid. In these circumstances, the fee may already have been paid. There have been cases of claims companies going out of business so that their "guarantees" turn out not to be of value and the insurance they promised to put into place not living up to expectations
Guest blog by John Shallcross (Associate at Blake Morgan), Leigh Sayliss (Partner at Howard Kennedy) and Sean Randall (Partner at Blick Rothenberg)