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HMRC SDLT: Guidance on SDLT Returns for Leases After Substantial Performance Completion

Procedure: Completion Following Substantial Performance of Agreement for Lease

This article explains the process that occurs when there is substantial performance of an agreement for the grant of a new lease before that lease is officially granted. When this happens, the agreement can sometimes be treated as if a notional lease has been granted. When the actual lease is eventually granted following this, there may be additional Stamp Duty Land Tax (SDLT) obligations. This guide breaks down the relevant rules and requirements for both situations: when the actual lease is granted on or after 17 July 2013, and when it was granted before that date.

Understanding Substantial Performance

Substantial performance refers to a situation where the obligations under an agreement for lease are mostly met, even if the formal lease has not yet been granted. In such cases, the agreement can be considered as a notional lease. This means that certain tax obligations begin even before the actual lease is signed.

When the Actual Lease is Granted on or After 17 July 2013

When the actual lease is granted after this date, the following applies:

• The notional lease and the actual lease are treated as one single lease. This lease is considered to have been granted on the date when substantial performance took place.
• The notional lease and actual lease are seen as linked transactions. If the actual lease results in a higher tax liability than what has already been paid, a further return is necessary.
• If no additional tax is owed, there is no need to notify HMRC.
• The responsibility for any additional tax lies with the lessee of the actual lease.

Filing a Further Return

If the notional lease was already notified to HMRC, the lessee must file a further return within 30 days from the effective date of the actual lease. This return should be sent as a letter to the Stamp Office and must include the following information:

• UTRN of the Original Return: This is the Unique Taxpayer Reference Number that was provided with the initial submission.
• Details of the New Calculation: Provide a breakdown of how the new tax due is calculated based on the actual lease.
• Appropriate Payment for Additional Tax Due: Include payment for any tax that is owed as a result of this new calculation.

If the notional lease had not been notified, and the granting of the actual lease means that SDLT is now owed, the lessee must submit an SDLT1 form within 14 days from the effective date of the actual transaction.

When the Actual Lease is Granted Before 17 July 2013

For cases where the actual lease is granted before this date, the following rules apply:

• The grant of the actual lease is treated as a separate transaction, even though it is linked to the notional lease.
• Overlap relief can be used, which helps to prevent double taxation.

Filing the SDLT1 Form

In this situation, the further return will require a new SDLT1 form rather than a letter. This form should be submitted to the Stamp Office. Importantly, if the Net Present Value (NPV) is zero due to overlap relief, there is no need to notify HMRC.

Important Considerations

• The overlap relief means that if the tax calculation at the time of the actual lease grant is less than what was paid during the substantial performance phase, the application of this relief cannot create a negative figure. This means that a refund cannot occur in these situations.

It’s essential to understand the implications of these rules, especially regarding any potential tax obligations and how to correctly file returns and forms to ensure compliance with HMRC regulations.

Example Scenario

Consider a company that enters into an agreement for a lease on 1 January 2014. The company substantially performs the agreement by meeting most conditions of the lease by 1 March 2014. Following this, the actual lease is granted on 1 April 2014.

• Since the actual lease is granted after 17 July 2013, the notional lease and actual lease are treated as one and granted on 1 March 2014.
• If the SDLT calculated for the actual lease is greater than what was previously paid during substantial performance, the company is required to file further returns showing the new calculation and should pay any additional tax owed within the stipulated time.

On the other hand, if the actual lease had been granted on 1 April 2013 instead, it would be a separate transaction. The company could still apply for overlap relief, and since the NPV might be nil, there may be no requirement to notify HMRC about the actual lease.

Final Notes

The completion of the process following substantial performance of an agreement for lease involves careful attention to dates and tax calculations. It is vital for lessees to understand their filing obligations fully to avoid penalties or complications with HMRC. Keeping accurate records of both the notional and actual lease transactions will help with this.

Where to Send Your Returns

All returns and forms should be directed to the appropriate Stamp Office. Ensure that you include correct and complete information as required.