Land and Buildings Transaction Tax review: Scottish government policy evaluation 2025-2026

A7 – Working Group Discussion – Lease Penalties

1. Participants broadly considered that the application of penalties for late returns, particularly where no tax is due, is disproportionate. Concerns were also raised in this regard about the daily penalty arrangements, and the extent to which this was appropriate for the LBTT lease regime. This was seen to undermine the penalty’s behavioural intent and felt punitive.

2. Participants noted concerns that the penalty system does not effectively distinguish between deliberate non-compliance and genuine oversight. Penalties felt unfair in the latter context, particularly when nothing had changed and no tax was due (i.e. the information held by RS remains accurate).

3. On the other hand, there were reflections on the need to consider compliance and the potential impact on the level of lease returns should there be no penalties in place to encourage this.

Alternative Penalty Models

4. There was discussion on whether an exclusively tax-geared approach might assist, or whether the penalty regimes in place for other taxes might have relevance for LBTT lease reviews.

5. A tax‑geared penalty is a penalty which is calculated as a percentage of the tax that is due, understated, or unpaid. Instead of being a fixed monetary amount, the penalty scales with the size of the tax error.

6. On the former, there was interest in the introduction of a purely tax-geared approach to penalties as a way to improve proportionality within the LBTT lease review penalty framework. The rationale behind this approach was that penalties should reflect the financial impact of non-compliance. For example, if a taxpayer submits a nil return late and no tax is due, a penalty calculated as a percentage of the tax due (e.g., 5% of £0) would result in no penalty. This was seen as a fairer outcome than the current fixed penalties.

7. In terms of other taxes, it was suggested that consideration could be given to the revised VAT penalty points system, which was introduced to encourage compliance through a more graduated approach. Under this system, taxpayers accrue penalty points for each instance of non-compliance. Only when a certain threshold of points is reached do financial penalties apply. This model allows for occasional errors without immediate financial consequences, while still addressing persistent non-compliance.

8. Additionally, the relevance of the Corporation Tax penalty model was discussed, particularly its treatment of serial offenders. In this regime, penalties escalate based on repeated failures to comply, with higher penalties applied to those who consistently miss deadlines.

9. This approach was seen as potentially useful for LBTT, where some taxpayers may repeatedly fail to submit lease review returns. A graduated penalty structure could help distinguish between occasional oversight and habitual non-compliance, ensuring that penalties are proportionate to behaviour.

Bespoke Approaches

10. Participants reflected on the case for distinguishing between different categories of taxpayers when evaluating the fairness and effectiveness of the lease penalty framework, or the overall lease review arrangements.

11. In terms of the application of penalties for leases, participants suggested that categories might include e.g.:

• Taxpayers with no amendments to their leases, but who are nonetheless currently required to submit nil returns.
• Taxpayers required to submit e.g. termination returns.
• Taxpayers submitting nil returns which are late.
• Taxpayers reporting changes to their tax liability.

12. Participants also expressed support for considering the development of a bespoke lease review penalty regime that would be distinct from the framework currently applied to conveyancing transactions or to the initial lease return.

13. This could reflect differences between initial conveyancing transactions and lease returns (in relation to which a taxpayer would be more likely to receive legal advice), and ongoing tax relationships associated with the lease review process that may trigger multiple reporting obligations over time, such as three-yearly reviews and termination returns.

14. There was also a broader reflection during discussion on whether there might be scope to move to a system where only a small number of leases are subject to the three yearly review requirement. This might take, for example, tenants with shops with relatively low value leases where nothing is likely to change out of the scope of regular review, but ensure that e.g. significant commercial leases remain in it.

15. Participants suggested that this might address the concerns around the fairness of penalties and allow RS to put more compliance effort into reminding a smaller number of taxpayers that returns are due.

Taxpayer Communications

16. There was discussion around the arrangements applying to communications by RS to taxpayers and agents, including the absence of any legal requirement for RS to remind taxpayers of their obligations (as LBTT is a self-assessed tax), and taxpayer expectations. Points raised on this included that:

• Whilst there is no statutory obligation on RS to issue reminders, they do so as a matter of practice. Letters and lease review reminders are sent at various stages prior to the return deadline.
• For penalty-related correspondence, RS systems now check against Companies House data to ensure that notices are sent to the registered office of the company. It was acknowledged that this process is not without complexity, particularly when dealing with individual taxpayers or entities with multiple addresses.
• Consistency in communication practices was seen as key. Participants noted that taxpayers who have previously received reminders may come to expect them, and any deviation from this pattern can lead to confusion and non-compliance.

17. Stakeholders suggested that consideration might be given as to whether there should be a statutory obligation on RS to issue reminders as a way to encourage taxpayers to keep their contact details with the tax authority up to date and assist taxpayers with their ongoing monitoring task.

Agent Liability

18. There was discussion on whether penalties should be extended to agents in cases where non-compliance with LBTT obligations is due to agent error. There was strong and unanimous opposition to this from participants on both practical and principled grounds.

19. Participants highlighted the difficulty in evidencing agent fault as a major barrier. In many cases, the relationship between taxpayer and agent is governed by private engagement terms, and RS would not have access to the necessary documentation or context to determine whether an error was due to the agent’s actions or the taxpayer’s instructions. This lack of transparency would make enforcement inconsistent and potentially unfair.

20. There were also concerns about market distortion. If agents were made liable for penalties, it could discourage professionals from offering LBTT-related services, particularly for leases, which are already seen as administratively complex. This could reduce access to professional support for taxpayers and ultimately harm compliance rates.

21. Participants noted that existing recourse mechanisms such as professional indemnity insurance and complaints procedures through regulatory bodies already provide avenues for taxpayers to seek redress when agent errors occur. These systems are well-established and better suited to resolving disputes between clients and their advisers.

22. As an alternative, participants suggested that HMRC-style agent registration and standards enforcement could be a more appropriate way to address concerns about agent conduct. Under such a system, agents who repeatedly fail to meet compliance standards could face sanctions such as suspension from the register, which would indirectly affect their credibility and client base. This approach was seen as more proportionate and administratively feasible than direct financial penalties.

Discretionary Powers and Reasonable Excuse

23. Participants expressed support for RS having greater discretion to waive penalties, particularly in cases involving nil returns or genuine errors. The current framework, while functional, was seen as rigid in its application, often failing to account for the nuances of individual taxpayer circumstances.

24. Participants argued that a more flexible approach would better reflect the principles of fairness and proportionality, especially where no tax is due and the failure to submit a return stems from oversight rather than deliberate non-compliance.

25. RS officials confirmed that they actively apply the “reasonable excuse” provisions in the legislation when assessing penalties, and that their approach is informed by relevant tribunal decisions.

26. These decisions encourage officials to consider whether the circumstances of a case suggest a reasonable excuse, even if the taxpayer hasn’t explicitly claimed one. This reflects a commitment to fairness and ensures that genuine errors or unforeseen events are taken into account. There are however challenges in applying discretion consistently. Without clear statutory discretion in some areas, penalties are automatically triggered when certain breaches occur.

27. This means that RS can only review or reduce penalties after they’ve been issued, which can lead to administrative burdens and frustration for taxpayers who feel their situation warrants leniency. Ensuring fairness while maintaining consistency across cases remains a key concern in the application of discretionary powers.

28. Participants also discussed the potential value of clearer public guidance on what constitutes a reasonable excuse. While RS’s current guidance provides general principles, it avoids listing specific examples to prevent misinterpretation. However, participants suggested that illustrative case studies or anonymised examples could help taxpayers better understand their rights and responsibilities.

Alternative Sanctions and Transparency

29. The group explored the possibility of introducing non-monetary sanctions as part of the LBTT lease penalty framework, particularly in cases of repeated or deliberate non-compliance. As part of this discussion, reference was made to an HMRC publication of deliberate defaulters, and of a published list of employers who fail to meet obligations such as paying the national minimum wage.

30. There was a view that such approaches may be appropriate in cases of serious or repeated breaches, but would be excessive for minor or inadvertent errors.

31. RS officials noted that most cases of non-compliance are due to oversight or misunderstanding rather than intentional avoidance. As such, a focus on improving awareness, guidance, and administrative support to encourage voluntary compliance is likely to be more effective than public sanctions.