Posted by Sarah Keegan, co-founder of Legal Futures Associate The CS Partnership
Keegan: Law firms are increasingly being sued for incorrect tax submissions
Stamp duty was first introduced in England on 28 June 1694, during the reign of William and Mary, under “An act for granting to their Majesties several duties upon vellum, parchment and paper, for four years, towards carrying on the war against France”.
It was clearly a very successful way of raising taxes – by the financial year 1702/3, 3,932,933 stamps were embossed in England for a total value of £91,206.10s.4d.
Onto a good thing, during the 18th and 19th centuries, various governments then extended stamp duty to cover newspapers, pamphlets, lottery tickets, apprentices’ indentures, advertisements, playing cards, dice, hats, gloves, patent medicines, perfumes, insurance policies, gold and silver plate, hair powder, and armorial bearings.
In fact, Parliament needed to raise cash after the end of the Seven Years’ War in 1763. Since the war benefitted the American colonists, it was decided that they should pay for it. Parliament loved the idea that it could easily enforce this tax, and so it attempted to enforce the Stamp Act 1765 in the British colonies.
The American colonists were furious, and it led to the outcry “no taxation without representation”. Although the outcry made Parliament quickly repeal its international stamp duty collection a year later, the indignation from the colonists whipped up over the following decade gave rise to the revolutionary war, and ultimately led to American independence.
Conveyancers can legitimately tell their clients that the argument over stamp duty being imposed contributed to the outbreak of the American War of Independence.
Some 326 years on from Parliament enabling William and Mary to raise taxes on vellum, parchment and paper, and stamp duty’s successor (stamp duty land tax, or SDLT) has continued to dominate many headlines this year.
The SDLT holiday announced last summer has hugely impacted the residential property teams around the country with enormous increases in transactions. The new 2% surcharge on non-resident buyers came into force on 1 April and, of course, the SDLT holiday deadline was extended in the spring budget.
But apart from the fabulous fact that stamp duty gave rise to the America we know today, and the SDLT holidays, there is something else that I talk about too frequently with property teams – which is that SDLT is not stamp duty.
Whilst it has some of the same words in its name, it is not the former tax on property deeds that existed pre-December 2003.
We used to take or send property documents to the stamp office, have our figures checked by a human who confirmed them in pencil on the face of the deed and then stamp machines would actually affix the right number of stamps (with tiny pieces of silver in them) on the documents, along with a ‘Particulars Delivered’ stamp.
But as we know, the Finance Act 2003 largely repealed our old pal stamp duty, and SDLT was introduced in its place.
And this is the sentence that we say too many times to property teams (as basic as it sounds): SDLT is a form of self-assessed transfer tax charged on ‘land transactions’.
Doesn’t that sound like a pedantic sentence? Let me repeat it – SDLT is a form of self-assessed transfer tax charged on ‘land transactions’ and it is not a stamp duty on transfer deeds (which of course, was only applicable when a land transaction occurred).
It sounds a bit like “You say pot-ay-to, and I say pot-ah-to”. And indeed, for typical property transactions such as buying and selling a house, not much changed from 1 December 2003 onwards, except that a tax return was then required to be made to HM Revenue & Customs (HMRC) after your completion, and our clients had to sign the SDLT return form.
But it is sneakily different. SDLT is a self-assessed tax like income tax, and HMRC can look into an SDLT return and recover unpaid SDLT. It fines the failure to submit returns in time, even if no tax is payable. Because it is a self-assessment tax, our clients need to SELF-ASSESS. Forgive me if your teams are all doing all this correctly, but many teams are not.
I think we rush to calculate the amount of tax for our clients, often right at the outset of a transaction before we really know their details because of the following:
- Pressure from the industry (conveyancers being pushed to do everything faster, sharper, and better for less and less profit);
- Competition in the industry (service and pricing);
- Client demands; and
- The (pretty) basic SDLT calculations within quoting tools.
The problem that we are seeing more of is that there is a growing number of accountancy firms and others encouraging the public to make claims against law firms’ professional indemnity insurance, because the amount of SDLT has been overpaid.
I have been told that this is the new PPI claims. These claims are either leading to higher insurance premiums for firms or they are choosing to pay the claims themselves from their profits without going to their insurers.
We would never take on the role/advice/risk of valuers, mortgage brokers, surveyors or structural engineers. Whilst most firms tell the buyers that it is their responsibility to ensure that the SDLT figures are correct, there seems to be a mental block in our minds about ensuring that we are not tax advising, which is why we are being increasingly sued for incorrect tax submissions.
I cannot help but wonder if it is because we still think we are dealing with stamp duty.
The Law Society says: “A solicitor who does not have the necessary specialist knowledge of tax should not advise on it and may need to advise clients to obtain specialist SDLT advice, especially in relation to higher risk transactions.”
And here is another fact that your teams may not be aware of – HMRC’s SDLT calculator states that it will calculate the SDLT payable for most transactions. It does not guarantee that, if you use its calculator online, your figures are correct!
It really is worth looking at this element of your transactions again and discussing the matter with your insurers and, if you have not already recently done so, then changing your workflows, procedures, tools, and systems to protect yourselves. As if you didn’t all have enough to do!
Call Sarah Keegan or Clair Payne on 0333 939 8389 or email us at enquiries@thecspartnership.com if you would like any assistance about dealing with this issue.
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