Grasping the thistle

Ernst & Youngs Land & Buildings Transaction Tax survey

In association with

Research sample andmethodology

The data for this research report were collected via an online survey comprised of 21 questions, which was conducted over a period of four weeks in Spring 2013. Of the 71 respondents who took part in the survey (representing 55 companies with operations in Scotland) all are in senior management positions or above. A further 12 companies were headquartered elsewhere in the UK and the remaining four companies were based overseas. The respondent companies came from eight sectors, with the highest proportion of responses being from financial services (29% of respondents) and professional services (27%) which included members of the Royal Institution of Chartered Surveyors, Scotland. The other sectors represented include oil & gas/oilfield services(11%), consumer products (10%), tourism & hospitality (7%), life sciences/biotech (7%), engineering (6%) and food & beverage(3%). An indepth sector analysis did not identify any significant variation in views although respondents were given the opportunity to provide additional written comments and some of these anecdotes are provided as commentary to the surveyfindings. The respondents also widely varied in size, with 38% reporting turnover of less than 10mn a year, 22% between 10mn and 50mn a year, and the largest grouping, 40% reporting turnover of more than 50mn a year.

Survey participants by sector

7% 10% 6% 27%

Consumer products Financial services Life sciences/biotech Engineering Food & beverage 29% Oil & gas/oileld services Professional services

11% 7% 3%

Tourism & hospitality

Grasping the thistle Ernst & Youngs Land & Buildings Transaction Tax survey

Foreword
The Land & Buildings Transaction Tax: an opportunity for the Scottish Government to communicate, engage and demonstrate its credentials in devolved taxation
Background
As most readers of this report will be aware, the Scotland Act 2012 gave the Scottish Parliament powers to introduce a tax on transactions involving land and buildings located in Scotland. The Scottish Government has decided to exercise this power by introducing the Land & Buildings Transaction Tax (LBTT). From 1 April 2015, the new tax will be levied on outright purchases of land and buildings, grants of new leases, assignations of existing leases, and other land-based transactions. It will replace Stamp Duty Land Tax (SDLT), and will apply to both residential (but not residential leases) and non-residential transactions. The drafting of the LBTT legislation followed a wide-ranging consultation process by the Scottish Government. In general, the strategy has been to use the existing SDLT provisions where appropriate, but to adapt them to take account of Scots law. However, the LBTT also contains a number of fundamental changes from SDLT, the most significant of which is a move to a progressive structure. SDLT is charged on the basis of a so-called slab system, which produces significant distortions: a non-residential property acquired for 249,000 attracts an SDLT charge at 1% (2,490), whereas one bought for 251,000 incurs SDLT at 3% (7,530). To avoid such distortions, LBTT will be a progressive tax, with only the amount in excess of each threshold charged at the higher rate. The bands and rates for LBTT may be announced by September 2014. If the new tax is introduced on a revenue-neutral basis, it is likely that LBTT will be lower than SDLT on lowervalue 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 tax rate may apply for non-residential property than for residential. Alongside the new tax, a further key change is the creation of Revenue Scotland as the tax authority overseeing and managing Scotlands devolved taxes, includingLBTT. However, Registers of Scotland will act as the collection agency for LBTT.

Key findings
Our study investigates the views and understanding of senior business people across Scotland on all these developments. LBTTis at an advanced stage of development, and could potentially have a significant impact on Scotlands economy and property lending practices, whilst also helping to iron out the house price peaks currently seen at the SDLT thresholds. Yet the results reveal a surprisingly low level of awareness and interest in the new tax. This points to a need for the Scottish Government to engage and communicate more around the new tax, together with the opportunity to establish its capabilities and credibility in devolved taxation. With the bands and rates for the new tax yet to be announced, our respondents reaffirm the importance of the levels at which these are set. Most believe that the rate of LBTT will be an important consideration for businesses when deciding whether to invest in land (including leases) in Scotland. The consensus is that the level of rates should not disadvantage Scotlands economy or deter international investors. The timing of the band and rate announcements will also be key, to avoid creating short-term market distortions. Other findings in our research underline the opportunity to have a Scottish tax system. Again, there is a need for clear communication and demonstration of capability: this is the first implementation for Revenue Scotland and needs to be a success, but most interviewees indicated some concern that Revenue Scotland will not be fully up to speed by April 2015. However, more positive signs include the strong support for a General Anti-Avoidance Rule (GAAR), and for the Scottish Government using LBTT as an economic tool to support its wider policies around land and property. Overall, our study suggests that, ahead of next years announcements on bands and rates, engagement and communication should be priorities for the Scottish Government. The good news is that efforts to generate understanding and support for the new tax will be helped by LBTTs progressive nature. Given the current relatively low level of understanding of LBTT, the fact that a majority of respondents already believe its progressive basis will have a neutral or positive impact on the Scottish economy provides a sound base for Government to buildon. Its now time to do so. Paul Gallagher Tax Partner, Ernst&Young Scotland

Grasping the thistle Ernst & Youngs Land & Buildings Transaction Tax survey

If there is a significant difference between LBTT and SDLT for comparable investment in England, the stamp cost is likely to influence the investment decision.

Any material differential between Scotland and the rest of the UK will result in lower investment in property in Scotland. It potentially puts Scottish real estate on the too difficult pile!
Together, these findings send a clear message that Government communications need to be ramped up to reach a wider audience and potentially brought forward to give an earlier idea of the target LBTT rates and bands, and therefore of the practical and financial impacts on property transactions.

Respondents understanding of the new tax

We have undertaken this survey at a time when the change from SDLT to LBTT is at an advanced stage in its development. It will be enacted into law in summer 2013, with the announcement of the bands and rates due around September 2014, and the introduction of the new tax scheduled for April2015. However, our research confirms that a large percentage of senior business people in Scotland are relatively unaware of the switch to LBTT or still unconcerned by the change. As Chart 1 shows, only 44% of our interviewees in businesses across Scotland say they are aware or very aware of the move from SDLT to LBTT, with a further 10% professing themselves to be interested in learning about it. Almost half, (45%), are either unconcerned or not very aware about the new tax.

Chart 2: Compared to other factors, will the rate of LBTT be an important factor for business when deciding whether to invest in land (including leases) in Scotland?
4% 21% 13% Unimportant Not very important 30% Important Extremely important Vital 32%

Chart 1: How aware are you of the planned change from UK Stamp Duty Land Tax (SDLT) to Scottish Land and Buildings Transaction tax (LBTT) from 1 April 2015?
14% 1% 6% 30%

Aware Interested Not very aware Did not answer Unconcerned 10% Very aware

This need for clear and early communication is further underlined by the important role that LBTT will play when businesses are deciding whether to invest in land in Scotland. As Chart 2 shows, over half of our respondents say the rate of LBTT will be an important or extremely important factor in these decisions.

39%

Grasping the thistle Ernst & Youngs Land & Buildings Transaction Tax survey

Depending on the quantum, the rate of LBTT will be a factor in influencing the decision as to where to locate new or existing operations.

Given commercial pressures, changes in costs or values of 1% or 2% are likely to heavily influence decision making.

A generally receptive view of the progressive basis of LBTT

As the Scottish Government seeks to boost awareness and understanding of the new tax, the study suggests that its efforts will be met with a willingness to accept LBTTs progressive structure. In light of the current relatively low level of knowledge of LBTT highlighted, it is a positive sign that a few businesses have accepted the progressive structure of the LBTT, and feel it is likely to benefit the Scottish economy.

The opportunity to have a Scottish tax system

A further message that comes across strongly in the findings is the significant opportunity that businesses foresee for Scotland to create a distinctively Scottish tax system that is specifically geared to the countrys needs. One indication of this potential is the respondents consensus that LBTT can be a useful means to support the Scottish Governments broader policy agenda. Decisions about what is taxed send clear signals about which economic activities Governments believe should be encouraged or discouraged. And, as Chart 4 demonstrates, there is strong agreement around the opportunity for the Scottish Government to use LBTT as an economic tool to support its wider policies in the land arena with 65% of respondents either agreeing or strongly agreeing.

Chart 3: What impact do you think the progressive structure of the LBTT will have on the Scottish economy?
1% 3% 17% 35% Very negative Negative Remain neutral Positive Very positive Did not answer 42% 2%

Chart 4: Should LBTT remain as neutral as possible or do you agree that it should be used as an economic tool to support the Scottish Government's wider policies in the land arena?
3%

30% 29%

Disagree Remain neutral Agree Did not answer Strongly agree

As Chart three shows, 18% of our interviewees take the view that the new taxs progressive nature will have a very positive or positive effect on the Scottish economy, even though rates for the LBTT have yet to be published. However, 42% remain neutral and are clearly waiting for more detail before making up their minds. This may suggest that the Scottish Government will be pushing on an open door in its drive to generate a greater understanding of LBTT, but with 37% taking a negative view, there is a clear need to ramp up communications to achieve greater support for LBTT.

3% 35%

Grasping the thistle Ernst & Youngs Land & Buildings Transaction Tax survey

Grasping the thistle Ernst & Youngs Land & Buildings Transaction Tax survey

It is impossible to make a balanced comment on the LBTT given the absence of information on rates applicable. The uncertainty is neither helpful nor desirable. It is a bit like being asked to get best value shopping when prices are not on display.
Businesses favourable view of a Scottish tax system is also illustrated by the strong support coming out of the survey for a GAAR covering the devolved tax. As Chart 5 shows, almost four out of five business people in our study support such a measure, which ties into the current public debate on tax avoidance. This finding also appears to inform the Scottish Governments stated aim to make LBTT simpler to apply in practice compared to SDLT.

Ernst&Young Viewpoint
Ken Wright Executive Director, Ernst&Young

Tackling tax avoidance: a need for flexibility in a challenging environment Perhaps unsurprisingly, given the ongoing public debate around tax avoidance, there is strong support from respondents to the survey for the introduction of a GAAR. The Scottish Government recognises that some of the worst examples of abusive tax planning have taken place in relation to SDLT, particularly south of the border where property prices are higher, and it is clearly determined to try to avoid, as far as possible, similar abuses of the LBTT regime. Generally, its approach is in line with the UK, in proposing an over-arching GAAR, supported by so called targeted anti-avoidance provisions within the detail of the legislation, and a simplification of LBTT in areas such as non-residential leases, partnerships, trusts etc. Where the Scottish Government approach becomes more controversial is in its proposal not to include a sub-sale relief within LBTT. Sub-sale relief is used by, for example, property developers, for wholly commercial reasons, but has also been abused for tax avoidance purposes under SDLT. The Scottish Government proposes that rather than having a general sub-sale relief, it will legislate to relieve specific commercial transactions. Whilst this approach may seem attractive it may prove difficult to achieve in practice, given the wide variety of potential commercial transactions. A more appropriate strategy may be to rely on the GAAR to deter and defeat any abuse of the LBTT regime, and provide the commercial sector with the flexibility it needs to do business in what is still a difficult economic environment.

Chart 5: Do you support the introduction of a General Anti-Avoidance Rule covering the devolved tax?
1% 21%

Did not answer Yes No 78%

Companies should be able to manage tax costs within the laid down rules, and if this allows too much leeway, then the rules should be tightened rather than companies be vilified.

Grasping the thistle Ernst & Youngs Land & Buildings Transaction Tax survey

Abusive tax planning should be caught. However, a GAAR is not appropriate for ill-conceived or badly-drafted legislation.
Annual Tax on Enveloped Dwellings (ATED), is an annual tax charge, which will apply from 1 April 2013, to companies owning residential properties (subject to a number of exceptions) with a market value of more than 2mn. The aim of the tax is to deter wealthy individuals from holding residential properties through these companies, as otherwise SDLT could be avoided on a future sale of the property, if this was effected by a sale of the shares in thecompany. The strength of support for Scotland gaining more control over its national tax affairs is further underlined by the respondents view on how ATED should be managed in relation to Scottish properties. The single most popular choice made by 37% of the business people interviewed was that administration of the ATED should be devolved to Scotland, against 32% who thought it should be administeredcentrally. Though there is still a substantial minority, (30%), who are yet to be convinced on whether this tax should be devolved or not.

Only if the whole of the UK addresses the issue can abusive tax planning be removed.

The need for Government engagement to buildunderstanding

So, taken together, our research findings indicate a clear need for close engagement and communication by the Scottish Government with stakeholders in the run-up to the introduction of the new tax. This will be vital to ensure wider understanding of LBTTs impacts, and to manage uncertainty about the impacts of its more progressive structure compared to SDLT. This engagement supported by an effective and efficient implementation process for Revenue Scotland will also enable the Scottish Government to overcome some pockets of scepticism that it can deliver on its administrative and operational goals in the area of devolved taxation. As Chart 7 shows, 79% of our interviewees are either uncertain or not very certain about Revenue Scotlands ability to be ready to collect and administer LBTT by the scheduled start-date.

Chart 6: What should happen to ATED relating to Scottish properties?

1%

Chart 7: Are you condent that Revenue Scotland will, by 1 April 2015, have sufcient resources, skills and expertise to effectively and efciently administer and collect LBTT?
1% 1% 3% 16% 21% Uncertain Not very certain Condent Certain Very condent Did not answer 58%

32%

30%

Dont know It should be devolved to Scotland It should continue to be administered centrally Did not answer

37%

There is a smaller proportion of highervalue residential transactions in Scotland. So if we have to tax any sector more, it might as well be that one and I dont think it would have a significant impact on the residential property market overall.

Grasping the thistle Ernst & Youngs Land & Buildings Transaction Tax survey

Businesses attracting senior people to Scotland dont want the property tax to be more expensive.
This uncertainty may be understandable, given that Revenue Scotland has not yet had an opportunity to build a track record of efficient and effective operation of devolved taxes. However, it does suggest that the organisation needs to build credibility through a more comprehensive educational communication programme with key audiences, a process that it has already begun through amongst other things, the Devolved Taxes Collaborative forum. Other findings also reflect a degree of negativity amongst our survey interviewees, with 70% expecting LBTT to result in more administration. Given that the SDLT regime will apply elsewhere in the UK, it may be inevitable that having different systems working on both sides of the border will create more red tape: however, this would certainly not be Revenue Scotlandsfault. The other areas where our study highlights concerns amongst respondents, and a need for communication by Government, are around the rates that will be levied under LBTT, and the new taxs effects on lending practices and market confidence. If the new progressive tax rate were to result in a higher LBTT charge for high-value non-residential property transactions in Scotland than in the rest of the UK, then 80% of respondents think that this would have a significant negative effect on the Scottish economy. Almost as many, (76%), say they think LBTT will have a negative impact on lending practices relating to non-residential property transactions in Scotland, whilst 65% think the same about residential transactions. Finally, 66% believe it will reduce house buyers confidence in Scotland as a result. Whilst such caution is understandable, its clear that lending practices may be impacted by the progressive rates and their levels, which have yet to be announced. Its also likely that the question on residential transactions would have received a more positive response before the property crash.

In order to stimulate the housing market at the lower level and to make the scheme revenue neutral, a higher rate at the top end would be required.

Grasping the thistle Ernst & Youngs Land & Buildings Transaction Tax survey

Should the rate of LBTT be greater for high value properties? Yes, but not significantly, as this would have an adverse effect on Scotland as a place to work.
Chart 8: Should the rate for high value residential properties (greater than 2mn) be signicantly greater than the standard rate?
2%

RICS Scotland Viewpoint

Sarah Speirs Director, RICS Scotland

LBTT rates for higher-value homes: a need to strike the right balance This is a great opportunity for the Scottish Government to showcase its capacity to introduce a fairer tax system and iron out house price peaks currently witnessed at band thresholds of the SDLT. Accordingly, we would urge the Scottish Government to err on the side of caution when considering a significantly higher tax rate for Scottish properties over 2mn. Such a proposal could put buyers and sellers of these properties at a disadvantage when foreign investors look to invest in the UK. Whilst there may not be a significant number of properties above the 2mn threshold in Scotland, the Scottish Government has to strike a balance in getting first-time buyers onto the property ladder (if that is the intention), whilst not discouraging investment at the higher end of the market. Furthermore, the lead-in period for the introduction of the new tax has to provide an adequate amount of preparation time for appropriate sectors, 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. It is not the Scottish Governments intention to announce LBTT bands and rates earlier than September 2014; in the residential market context, this timescale would beadequate. On the commercial side, however, where transactions can take longer than in the residential sector, consideration should be given to the possible knock-on effect a delay in announcing the LBTT thresholds could have on investor confidence and, ultimately, the potential damage to the Scottish economy. In this instance, the September 2014 announcement date should not be exceeded. Irrespective of the announcement date, the Scottish Government must now focus on raising awareness of the LBTT, and building confidence amongst the population that Revenue Scotland will be ready to implement this tax.

35% 63%

No Yes Did not answer

One possibility that has attracted particularly close attention is the idea of charging a significantly higher LBTT band on residential properties over, say 2mn. As Chart 8 shows, almost two-thirds, (63%), of our interviewees were opposed to a significantly higher rate for these transactions. Whilst the number of Scottish homes selling at above 2mn is relatively small, a wide differential in rates could act as a disincentive to senior people considering moving to Scotland. Having said that, many respondents consider that those who can afford to buy such properties should be prepared to pay the tax due.

In a Scottish context, this is very few houses. Far better to smooth the marginal rate between house values somewhat, which would help drive up transactionvolumes.

Grasping the thistle Ernst & Youngs Land & Buildings Transaction Tax survey

Conclusion: a time to communicate and decide on timing

The findings of our survey of Scottish businesses views on LBTT point to one overarching need: a concerted programme of communication by the Scottish Government to boost awareness of the switch to LBTT, of the new taxs progressive structure, and of the potential benefits it can bring to the Scottish economy and property market. Given the current relatively low levels of understanding and high uncertainty around LBTT revealed by our study, a programme to highlight these messages is imperative in the run-up to next years announcements on bands and rates. Turning to those announcements themselves, it will be vital to get the timing right. Whatever differential emerges between the existing SDLT tax charges and the new LBTT rates for similar transactions, there is clear potential for a short-term distortion in the market, especially in non-residential property. For this reason, the timing of the announcements on bands and rates will require careful judgement, and there is an argument for bringing them forward. Theyshould certainly not be delayed beyond the current target date of September 2014. In our view, the progressive nature of LBTT makes it a positive move for Scotland and its economy. The next step is to help individuals and businesses in Scotland understand why this is the case.

Grasping the thistle Ernst & Youngs Land & Buildings Transaction Tax survey

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