SDRT Compliance Checks and Penalties

If you're responsible for paying Stamp Duty Reserve Tax (SDRT) on share transactions, HMRC may carry out compliance checks to ensure you've paid the correct amount at the right time. Understanding what happens during these checks, the penalties you could face for errors or lat...

Introduction

What is an SDRT compliance check?

HMRC carries out compliance checks to verify that SDRT transactions have been handled correctly. These checks ensure that claims for repayment and SDRT relief are accurate, and that everyone is paying the right amount of tax.

During a compliance check, HMRC may:

Ask you or third parties for further information about transactions
Make inspection visits to look at your premises and assets
Audit your records
Check the systems you have in place

Most compliance checks are routine and don't necessarily mean HMRC suspects anything is wrong.

HMRC inspection visits

HMRC makes inspection visits to check records kept by securities dealers, unit trust schemes, and open-ended investment companies. These visits verify that records are complete and correct, and that SDRT regulations are being followed properly.

What to expect

HMRC will normally give you at least 3 weeks' notice of an inspection visit. If the suggested date isn't convenient, they'll try to arrange another date within a reasonable period. You can ask your professional adviser to attend the visit with you.

During the visit, you'll need to have all your SDRT records ready for the auditor to check. It helps to explain anything special or unusual about your record-keeping system. If you've discovered that additional SDRT should have been paid or included in earlier notices, you should mention this at the start of the visit.

Record-keeping requirements

You must keep information about each SDRT transaction to show that it was completed correctly. This includes details of payments, receipts, and any financial arrangements.

Keep your records for a minimum of 4 years from the effective date of the transaction, as HMRC can start a compliance check at any time during that period. If the effective date was before 1 April 2011, you must keep records for at least 6 years.

After the visit

The auditors will give you a brief summary of their findings at the end of the visit, along with informal recommendations about improvements to your systems if necessary.

HMRC will send you a full report within 28 days, setting out what they examined, the extent of the work done, their findings, and their conclusions and recommendations.

When errors are found

If HMRC finds an error during a compliance check, they'll ask for more information to understand what caused it and whether they need to collect additional tax, interest, and a penalty.

If you tell HMRC you've made a mistake in your SDRT payment or notified a transaction late, they'll make enquiries to find out the reasons. They usually do this by letter, and once they have all the information, they'll tell you what happens next.

SDRT penalties

Notification and payment deadlines

The deadline for notifying HMRC and paying SDRT depends on how the shares were transferred:

CREST transfers: The deadline is 14 calendar days after the trade date. This applies to CREST transfers and any transfer that could have been made through CREST but wasn't.

Off-market transfers: When shares are transferred off-market using a system other than CREST (and the transfer could not have been made through CREST), the deadline is the seventh day of the month following the month when the trade took place. For example, if a trade took place on 19 April 2020, the deadline would be 7 May 2020.

Late notification penalties (from 1 January 2015)

If you fail to notify HMRC by the notification deadline, you'll face:

An initial penalty of £100
After 6 months: £300 or 5% of the undeclared tax (whichever is greater), plus the initial £100
After 12 months: A further £300 or 5% of the undeclared tax (whichever is greater), plus the penalties above

HMRC can also charge daily penalties of £10 per day (up to 90 days) if your failure to notify continues for more than 3 months. They must give you written notice before starting daily penalties.

Example: Your notification is 16 months late and the tax due is £20,000. You'll be charged £100 initially, then £1,000 at 6 months (5% of £20,000), then another £1,000 at 12 months, totalling £2,100 in late notification penalties.

Late payment penalties (from 1 January 2015)

If you fail to pay by the payment due date:

31 days late: 5% of the unpaid tax
5 months and 31 days late: A further 5% of the unpaid tax
11 months and 31 days late: A further 5% of the unpaid tax

Example: The tax due is £20,000 and your payment is 16 months late. You'll be charged £1,000 at 31 days, then £1,000 at 5 months and 31 days, then £1,000 at 11 months and 31 days, totalling £3,000 in late payment penalties.

Late payment penalties are charged in addition to late notification penalties. Using both examples above, the total penalties would be £5,100, plus interest on the overdue tax.

Penalties for deadlines missed before 1 January 2015

Different rules apply to deadlines missed before 1 January 2015:

Within 12 months: The penalty is the lesser of £100 or the amount of tax due, plus interest
After 12 months: An additional penalty of up to the total amount of tax due may be charged, though this can be reduced depending on the reasons for the delay and your cooperation

Penalties for errors

HMRC will charge a penalty if an error is due to:

A careless mistake on the SDRT notice
An SDRT notice you submitted knowing it was incorrect
An SDRT notice you knew was incorrect and you did something to hide the inaccuracy

The penalty amount depends on the reason for the error and can be reduced based on factors you present to HMRC.

How to avoid penalties

HMRC expects you to take "reasonable care" when completing SDRT notices and making payments on time. Examples of reasonable care include:

Making sure your SDRT notice is accurate and submitting it on time
Ensuring all claims to reliefs and calculations are correct
Keeping sufficient records to support your SDRT notice
Providing all requested information to HMRC
Asking HMRC if you're unsure about anything and following their advice

If you find you've made a mistake, tell HMRC immediately. This may reduce or eliminate any penalty.

Appealing against a penalty

If you can't reach agreement

If you can't agree on the amount of tax, interest, and penalty with HMRC, they'll issue a "notice of determination" for the tax owed. You'll have to pay interest from the date the tax should have been paid until it's actually paid.

HMRC can also make a "penalty assessment" if they think a penalty is due but you don't agree.

How to appeal

You can appeal against a notice of determination or a penalty assessment if you disagree with HMRC's decision.

Consider paying some or all of the additional tax charged while your appeal is dealt with to stop interest mounting up. You'll receive interest on any amount you've overpaid if it's repaid to you.

If there's nothing wrong

If a compliance check finds nothing wrong, HMRC will tell you the check is over and no further action will be taken.

Sources

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.