ADS: The Missing Manual
(A Plain Guide - or at least as plain as we can make it (!) - to an appalling piece of legislation)
This is a guide for clients and property professionals who require an understanding of ADS hastily and inadequately introduced by the Scottish Government as of 1 April 2016. Any reader will find that they have a much fuller understanding by reading all of the following sections, but, the material is divided for easy reference.
Some very modern history…
The Scottish Government introduced the first purely Scottish tax in nearly 300 years in 2015. It was called LBTT and replaced the UK stamp duty. LBTT was planned as a more progressive tax than the UK stamp duty but arguably suffered from a rather bumpy introduction. It was certainly a more progressive tax in that the cost of the duty to purchasers of properties at lower prices was reduced as against the amount they would pay under the old system. However, the intent of the new LBTT was, overall, to collect the same amount of tax as the old stamp duty; by implication the cost of the new tax for properties above approximately £350,000 was increased, and, in the case of more expensive properties over £500,000, very sharply increased.
Outside of "hotspots” in some of the bigger cities, the market for expensive properties in Scotland is not strong. The addition of an expensive new tax appeared to those operating within the property industry to materially impact upon the numbers of expensive houses being transacted. Such observers believed that the Scottish Government would accordingly find it difficult to achieve the returns from the new LBTT tax that they had anticipated.
In November 2015, the UK government introduced (for the rest of the UK, not Scotland) an additional land tax aimed at reducing the property bubble being caused in the southern part of England, especially London. That property bubble arose from the substantial increase in the purchase of "buy to let" properties and second homes, often by foreign investors who saw the London house market as a liquid alternative currency in challenging times.
This new “buy to let/second home” tax appeared to be eagerly seized upon by the Scottish Government who announced their intention to follow the example of the rest of the UK. Given that Scotland is not subject to a property bubble (indeed large parts of Scotland have a fairly moribund property market) and that the new progressive LBTT tax had been introduced less than six months previously, some observers saw the alacrity with which the Scottish Government introduced their version of the “buy to let/second home" tax (now known as ADS) as an “early Christmas present” to reduce the problems they were perhaps encountering in making their new LBTT tax sums add up.
Is the ADS law simple?
When new laws are introduced, whether or not they are believed to be reasonable, the effectiveness of the new law is the ease with which it can be implemented and understood. On this measurement the new additional land tax ADS does not rank highly. The initial material produced less than two weeks before the law came into effect is 64 pages in length and incorporates 76 examples. Generally speaking, if something needs 76 examples to explain its calculations, it can be assumed that there will be unintended consequences from its implementation.
From an entirely apolitical viewpoint, the drafting of recent Scottish Government legislation has been woeful. In all fairness, the legislation produced by the Westminster Parliament is not much better, the overriding characteristic being heavy reliance upon a very technical approach. Very technical approaches are fine when dealing with regulation of very technical matters. But, buying and selling houses is, for the most part, a consumer driven requirement which is at the very heart of our society. Creating an overtly technical environment where, as can be seen shortly, there are civil and criminal liabilities tends to produce unintended consequences.
Sometimes, one wonders whether those people drafting legislation are living in the same world as the rest of us. In the past 30 years, the make-up of society has changed greatly, with many non-traditional family units and a great diversity of circumstances. It is particularly in those circumstances that the unintended consequences are most keenly felt.
How does ADS work?
As explained above, where the guidance for what should be a simple tax, extends to 64 pages with 76 examples, it is impossible to summarise the workings of ADS in a sentence or two.
The following is clear (hopefully - some nuances may have been lost in pursuit of clarity of explanation)
ADS only applies to residential properties
where ADS is payable it is charged at 3% of the whole of the purchase price or effective transfer price
ADS may be payable in transfers of title that take place as part of remortgage transactions
if a main or principal home (whether let or owned) is
being replaced by another main or principal home
for exactly the same people and
there is no overlap in ownership or possession between the old property in the new property.
ADS is not payable. Where this condition cannot be met, commonly where somebody is not moving out of an old property before moving into a new property, if the condition can be met within 18 months after the purchase of the new property, a claim for repayment of the ADS paid can be made.
If the purchase price or market value of the property, provided there are no other complexities, is under £40,000 then ADS is not payable
except in a very rare circumstance, if a property is being bought at £40,000 or more, not for personal occupation, then ADS is payable
particular problems arise in transactions where, as an example, a couple may be buying property together where one or both of them had a property interest previously. In summary the more “non-traditional” the arrangement the more likely it may fall foul of the unintended consequences of ADS.
At, McVey and Murricane we have developed an Expert System which is being updated as the legislation is more fully understood (a difficult process) and we make available that Expert System to clients when a personal quotation is requested by the clients. The Expert System will indicate whether the tax is definitely payable, definitely not payable or where the circumstances mean that the answer will only be available on a greater examination of the issues of the particular client. This system is available free of charge unless the greater examination (which McVey and Murricane call “Expert Review”) is required in which case a fee of £75 plus VAT is charged.
During the course of the transaction, to fulfil the regulatory obligations (these are detailed in much greater depth below) we ask clients to complete the transaction version of the Expert System so that there is an audit trail for the client and ourselves detailing whether ADS is definitely not payable, payable or sits in the area where greater examination is required. Where ADS is payable an additional charge of £35 plus VAT is made for the additional bureaucracy. Where the greater examination (again called “Expert Review”) is required then there is an additional fee which generally ranges £45-£95 exclusive of VAT.
How does ADS impose obligations on clients and solicitors?
ADS is a self-assessment tax: behind these friendly sounding words is a rather more Draconian truth. When a tax is self-assessment it means the tax collecting authority (in this case Scottish Revenue) effectively has three bites at the cherry.
Firstly, the Revenue authority does not need to spend time answering questions on whether something is satisfactory or not because it is down to the taxpayer to get it right. Secondly, the revenue authority is placing the onus entirely on the taxpayer to self-declare the tax. And thirdly the revenue authority can, after the event, investigate the circumstances in which to establish whether taxpayer has correctly self-assessed tax with civil and criminal penalties for those who do not deal with matters correctly.
In this respect, because property ownership is highly computerised, it is very easy for the revenue authority to check whether the returns are correct.
What obligations are placed on a solicitor?
McVey and Murricane constantly emphasise to the clients the ferocious regulatory environment in which we now find ourselves. As with all matters relating to taxation and regulation it is far easier for governments of any hue to aim at the ordinary person rather than taking on vested interests or global corporations. Governing authorities at all levels (United Nations, European, UK, Scottish and professional regulators) have attacked the traditional confidential relationship between a solicitor and his or her client. Solicitors have been corralled as “an arm of the state” in dealing with regulation relating to money laundering, tax breaches and multifarious other issues.
Not only does this bring an Orwellian overtone of “Big Brother” but, in our experience, is aiming at the wrong target it, perhaps, represents an attempt by those governing to demonstrate their readiness to deal with a lesser problem rather than deal with the international issues tat are the true source of the concerns.
What this means in practice is that McVey and Murricane, like all other solicitors, are effectively put in the position of policing regulation which impacts upon their clients. That is a most uncomfortable position but it is important that clients are aware that in respect of ADS there are a number of overlapping obligations upon a solicitor to ensure so far as possible that all tax is paid:
Anti-Money Laundering: the environment that is imposed upon solicitors in terms of the 2007 Money Laundering regulations include the requirement to make a reference to the National Crime Agency where ever a solicitor believes that there has been a breach of any tax law by a client or person who is engaging with the solicitor where there is a monetary transaction. Failure by the solicitor to follow this regime involves criminal and professional sanctions
Registration of Documents: whenever a client is buying a property, that purchase process is useless without registering the documents at the Land Register in Edinburgh. The Scottish Government recently introduced new legislation which imposes a criminal and civil sanction upon solicitors if they submit incorrect material to the Land Register. Part of the declaration that solicitors require to make is that all LBTT has properly been accounted for and indeed Land Registers are the tax collectors for Scottish Revenue
Clearly explaining the position to a client: the obligations imposed by the Law Society of Scotland is to ensure that solicitors bring matters such as ADS clearly to the attention of clients. If we do not do so then we are subject to professional sanctions.
Clients may feel that the tax is unfair and wish to challenge its imposition. Hopefully, it will be clear from what is stated above that for a client to potentially breach these ADS rules would be highly contraindicated. However, from the point of view of McVey and Murricane or indeed any other firm of solicitors, it would be lunacy to accept any situation where there is a possibility of future sanction given the criminal and professional responsibilities to which the firm would be potentially subject.
Because of this environment, where the information collection process by any solicitor, (in the case of McVey and Murricane using an electronic Expert System written by our in-house experts) indicates that ADS is payable there are only two options available to which allow the transaction to proceed:
ADS is paid and the client is absolutely free to make a claim afterwards for a rebate of the tax; or
the client is able to provide an opinion from a tax expert, addressed and sent directly to the solicitor, stating that in the opinion of the tax expert ADS is not payable
In summary the responsibility of the firm of solicitors is no longer just to primarily represent their client’s interest but at the same time meet a huge and increasing burden of regulatory checks effectively payable by the end user. It is a much larger question as to whether this is the right course for society but it is not a debate where the voice of the end user has any weight. Our recommendation to any client who believes these processes to be unreasonable is to make representation to their MSP because ADS is entirely the creation of the Scottish Government. But, a solicitor has no latitude whatsoever. It is a binary position; the tax is payable or it is not payable. There are no grey areas.