PII Risk: Are you confident that your firm is calculating SDLT correctly?

Insight

Published

11 June 2021

Howden recently convened a roundtable to discuss the complexity of Stamp Duty Land Tax (SDLT)[1] and the pros and cons of software that has recently been launched by SDLT Compass to address this issue.

Our guests included solicitors, licensed conveyancers, insurers’ risk managers, a PII defence solicitor, the SRA and the Law Society and Directors from SDLT Compass. The following article draws on some of the issues discussed at that event.

Background

In recent months, PII insurers have seen a significant increase in claims arising from a failure to apply for Multiple Dwellings Relief (MDR) from SDLT. At Howden, this has focused our attention on issues relating to the calculation of SDLT more generally. We have been keen to understand whether there are other SDLT reliefs and rules that are being missed that could lead to PII claims. We also wanted to know what solutions exist to assist both solicitors and licensed conveyancers to manage this risk.

It was against this backdrop that we were interested to learn more about a software application that has recently been launched by SDLT Compass to assist with screening for exemptions, calculating the SDLT payable and identifying where there are more complex issues that require further consideration and advice. We wanted to understand how the using the software might prevent errors and the potential for claims against a firm’s PII.

What we found out

During our discussions with SDLT Compass, we were surprised to learn from them that:

  1. there are currently 49 different reliefs from SDLT available[2]
  2. the HMRC ‘s online calculator is not sufficiently granular to cover all scenarios[3]
  3. SDLT Compass estimate that each year overpayments of SDLT to HMRC total £2 billion.[4]

Our investigations also took us to the HMRC website where we discovered multiple and lengthy documents that are routinely updated and detail various issues relating to the calculation of SDLT. We have been left wondering exactly how fee earners, working in this pressured and cost-sensitive area of practice, can keep on top of the issue and ensure that they are asking the right questions and calculating the correct amount of SDLT payable by their clients.

“We don’t really need to worry”

It might be tempting to dismiss this issue on the basis that most transactions are routine and the HMRC calculator is good enough to catch “most of” the “usual” reliefs available. Unfortunately that is not going to be a compelling defence when a disappointed client brings a PII claim against your firm for failing to apply the relevant relief. You might also struggle to explain this approach to the SRA given clause 4.3 of the SRA Code of Conduct for Firms which requires you to ensure that fee earners “are competent to carry out their role and keep their professional knowledge and skills….up to date”.

Given the number and scope of the available reliefs available, it is also difficult to be certain that a particular transaction is “routine”. You cannot be sure of that unless you ask the right questions – and it is only by having a good working knowledge of the various reliefs and other SDLT rules that you can be confident you know what those questions are.

We would also caution against dismissing this issue on the basis that your engagement letter or terms and conditions make it clear that you do not give tax advice. Once again, this could be a difficult argument in circumstances where this advice is buried within pages of text and you have nonetheless proceeded to undertake the calculation of SDLT and advise the client of the amount payable.

If stamp duty is overpaid, there is a 12 month time limit[5] (4 years in exceptional circumstances[6]) for claiming it back from HMRC. The ability to reclaim direct from HMRC might reduce or avoid a claim and costs against a firm’s PII provided the issue is raised within this time frame, but the matter would still be notifiable to insurers. Likewise, it does not address the potential for a complaint against the firm or the embarrassment and damage to your reputation that could arise from a poor review on websites such as Trustpilot.

Potential impact of using SDLT Compass on a firm’s PII

Firms are always keen to know if the adoption of risk management initiatives will achieve a discount on their PII premium. The management of risk is a key issue for your PII insurer and while they will view the deployment of appropriate processes and other risk management tools positively, it is unlikely they will generate an automatic discount on your PII premium. However, claims history is a significant driver in the calculation of premium, so it is important to always manage risk in a way that avoids claims.

CQS Compliance

Compliance with the requirements of CQS is another issue for firms to consider. In May 2019 a core requirement in relation to SDLT was introduced. It reads as follows:

1.2. Practices must have a policy in relation to Stamp Duty Land Tax (“SDLT”) which must include:

 a)how to audit trail the SDLT calculation and advice
 b)how and when to make checks between the consideration stated in the sale contract and transfer deed and SDLT Return and the payments on the solicitors’ client account ledger for the transaction
 c)a procedure for verifying the amount of SDLT payable, where applicable.[7]

We encourage firms to consider how they comply with this – and can demonstrate compliance. Will your procedure stand up to scrutiny? The use of software such as SDLT Compass might provide a useful solution here. It also generates a report that can be used to demonstrate compliance with CQS requirements.

What about the cost and will it shift liability?

Using third party software to address issues will inevitably involve additional cost. This can be passed on to clients as a disbursement or absorbed by the firm as an overhead.

Cost is always a sensitive issue when it comes to conveyancing services. Some purchasers will always default to the lowest price. Firms need to balance the potential loss of those clients who just want the cheapest deal, against the potential fallout from claims against the firm in the event of errors in the calculation of SDLT.

Decisions on how the use of a service is wrapped into the firm’s engagement with a client and whether the cost is absorbed as an overhead or charged as a disbursement will also influence issues such as:

  • Whether the client has a separate engagement directly with a third party supplier
  • Whether your firm is liable to the client for any errors in the tool, subject to a third party claim against the supplier.

It is important that a firm is transparent with clients from the outset regarding the basis on which the software is being used. This includes ensuring they are also aware of the potential for additional cost in the event that the transaction is identified as complex and requires referral for further consideration and advice.

Where to from here?

SDLT is a topical issue that has become increasingly difficult. This has been recognised by the Law Society in their Guidance issued on 21 March 2021 where they note: “SDLT has become a tax with complex rules about the scope, rates and reliefs”.[8] We encourage firms to review their current approach to the calculation of SDLT and consider whether this is an issue they need to address.

 

[1] Reference to SDLT includes Land Transaction Tax in Scotland & Wales where applicable.

[3] As confirmed on the HMRC website: “The calculator will work out the SDLT payable for most transactions. You should check the guidance if you are uncertain about how SDLT applies to your purchase or if you believe it may qualify for a relief.” www.tax.service.gov.uk/calculate-stamp-duty-land-tax/#/intro

[4] Estimated by SDLT Compass following discussions with professional negligence defence law firm and review of HMRC stats.

[5] Sch10(6) FA2003

[6] Sch10(34) FA2003

[7] Conveyancing Practice Scheme: Core Practice Management Standards

Jenny Screech

Written by Jenny Screech LLB (Hons)

Legal Consultant, Howden PII