Modernising stamp taxes on securities

Update: To read Simmons & Simmons response to the consultation, see this article.

Stamp duty has been dubbed the “stupidest tax”. It is anachronistic, administratively burdensome and unnecessarily complicates transactions for businesses. In 2017, the OTS recommended digitisation stamp duty, though nothing (immediately at least) came of those recommendations. But finally someone in government is listening and – hastened by administrative changes to physical stamping that were necessitated by the COVID pandemic – the government is finally consulting on proposals to put an end to stamping by introducing a new single tax on transactions in securities, largely based on the existing SDRT framework.

The consultation on replacing Stamp Duty and SDRT with a new single tax on transactions in securities is open for comments until 22 June 2023.

Background

Stamp Duty is a charge on paper instruments that transfer the beneficial interest in ‘stock’, ‘marketable securities’ or interests in partnerships where the partnership assets include stock or marketable securities. Stamp Duty is mainly charged on a specific form known as a stock transfer form, but is also charged on any other instrument that transfers the beneficial interest in ‘stock’ or ‘marketable securities’.

SDRT was introduced on agreements to transfer uncertificated (paperless) shares and other securities in 1986 and, with the growth of paperless transactions, SDRT rather than Stamp Duty now applies to most transfers of shares and securities. It is charged on agreements to transfer ‘chargeable securities’. Most securities are settled through the CREST settlement system and are known as ‘dematerialised’ as they are held in electronic rather than ‘materialised’ paper form.

Following the 2017 OTS report, the government concluded that it was necessary to consider the stamp taxes applying to shares (STS) as a whole and HMRC then subsequently issued a Call for Evidence in 2020, to explore potential guiding design principles and options for the modernisation of STS.

The consultation recognises that Stamp Duty, as a paper-based regime, is often regarded as an anachronistic feature of the UK tax system. These issues were further highlighted by the need to temporarily halt manual processes due to the restrictions put in place from March 2020 in response to COVID. HMRC subsequently removed the need for the physical stamping of documents and was able to restart processing Stamp Duty through allowing information to be sent electronically. However, the changes made due to COVID are viewed by industry and HMRC as a stepping stone on the way to digitalisation rather than the desired level of modernisation and digitalisation envisaged in the OTS report. The government’s view is that now is the right time to explore options for fundamental redesign of the STS framework.

Consultation

The government proposes to introduce a mandatory, single tax on securities instead of separate taxes for electronic transfers (SDRT) and paper instruments (Stamp Duty). The consultation notes, however, that there are differences between the way that listed and unlisted shares are traded and that unlisted shares can have complexities around value that do not exist for listed shares. As such, but only where it is deemed necessary and appropriate, there may be instances where listed and unlisted shares are treated differently within the single tax framework. This should allow a single legislative framework for STS that is practical and in line with the guiding principle of ease of use.

The government proposes that any new, single tax should be self-assessed. Most SDRT is collected through CREST (the UK Central Securities Depositary) where transactions take place electronically. As such, the consultation recognises the need to ensure that any disruption to the markets is minimal as a result of this project. CREST as a collection method is simple and works well. The government proposes that transactions under any new single tax that would currently have their tax collected through CREST under SDRT, continue to have their tax collected through CREST.

The government proposes that transactions not undertaken through CREST should be notified to and payment made through a new online portal. It is the government’s intention that the online portal process will be less burdensome than the current manual process for Stamp Duty and the government expects it to make dealing with STS tax returns easier and quicker for both businesses and HMRC. As is currently the case with Stamp Duty, transactions notified via the new online portal will not be treated as ‘stamped’ unless any tax due is paid.

Liable persons

Current Stamp Duty legislation does not specify who is liable to the tax. However, in most cases, it is the purchaser who pays the tax as they cannot legally register their ownership of the shares without evidence of payment. For SDRT the purchaser is the liable person.

For a modern, self-assessed tax it will be necessary to hold somebody liable and accountable for the tax. The government proposes that the purchaser would become the liable and accountable person for non-CREST transactions and that the SDRT liable and accountable persons rules would be kept in place for CREST transactions.

Accountable date

Currently in Stamp Duty the chargeable point is execution of the document that completes the transaction. In SDRT it is at the point that an agreement to transfer is made. The government considers a single charging point as preferable to maintaining two separate ones for listed and unlisted shares. The consultation recognises that may raise issues for unlisted transactions, particularly where valuations are involved or there are complexities within the transaction. However, it is intended that these will be mitigated through conditional agreements and the accountable date being at a later point to the charging point, giving time for the transaction to be resolved before notification of the transaction and payment of the tax is due

The government proposes having a single charging point at the relevant date in any new single tax. The relevant date will either be the point of agreement, or where there are conditions on the agreement the relevant date will be when those conditions are fulfilled, with an overall two-year time limit. Payment of the tax would be required within 14 days of the charging point.

Geographical scope

Stamp Duty can in theory apply to any instrument of transfer executed in the UK irrespective of the location of the company and its share register and this lack of legislative clarity remains a barrier for risk-averse investors. In contrast, SDRT applies to UK securities no matter where they are traded and no matter where the parties involved are based. The government proposes that the SDRT rules should be applied to any new single tax on shares.

The consultation notes that there can be issues over determining where a share register is held (especially in the case of an electronic share register) but does not intend to address this issue, but will instead use whether shares are in a UK incorporated company or not as the key factor for whether they are in scope of the new single tax.

Meaning of chargeable securities

The consultation recognises that the way the legislation currently approaches the definition of “securities” (covering stocks and bonds) is not ideal. The current rules essentially include both equity and debt within scope of both Stamp Duty and SDRT, followed by a large carve out with exceptions then being made to that carve out.

The government proposes to explore a different approach, in which the scope of a new single tax would be non-government equity in UK incorporated companies, including stock and bonds with equity like features (equity like features will need to be defined along similar lines to the loan capital exemption). The aim of this would be to enable the removal of the loan capital exemption by including its parameters in the overall rules for the scope of the tax.

As regards warrants and options, the government proposes that any new single tax would adopt the current SDRT treatment of warrants and call options, the result of this is that the granting of them would fall outside of scope, but their transfer would be chargeable.

The consultation also considers how the new single tax might apply to in specie contributions and redemptions from collective investment funds and also to for mergers.

Partnership interests

Transfers of partnership interests are currently in scope of Stamp Duty, where the partnership holds stock or marketable securities. Previously, their inclusion in scope has been used to guard against the use of partnership interests as a means of avoidance. The government proposes taking partnership interests out of scope under any new single tax either through the way scope is legislated or through a relief or exemption. The government also intends to introduce anti-avoidance legislation to prevent partnership interests being used as a method of transferring share ownership in order to avoid STS.

Consideration

The government proposes to use the current SDRT consideration of money or money’s worth for any new single tax.

The current Stamp Duty rules for contingent, uncertain or unascertainable consideration are complex. For SDRT, uncertain and unascertainable consideration is dealt with by a reasonable estimate being paid at the point of agreement. For any new single tax, the government proposes to follow, instead, the existing SDLT rules for uncertain and unascertainable consideration, including the ability to apply for a deferral, but with the addition of a time limit of 2 years for deferment.

Exemptions and reliefs

Currently, to minimise the admin burden for small transactions, there is a £1,000 de minimis in Stamp Duty, which means that any transactions that have a consideration of less than £1,000 fall out of scope and are treated as exempt. For SDRT there is no de minimis. As a result, the government proposes removing the £1,000 de minimis that currently exists for Stamp Duty.

The consultation also considers a range of other issues including: the scope of intermediary relief; stock lending transactions; share buy-backs; and reconstructions.

As regards, group relief, the consultation notes that group relief is currently available in Stamp Duty but not in SDRT. This can create unnecessary complexity with some transactions having to go through the process of materialising shares in order to benefit from the relief, unnecessarily generating extra work and expense. The government proposes that under any new single tax Group relief is retained, with consideration as to whether the anti-avoidance rules can be clarified further to make them clearer for taxpayers.

Consequences of not stamping

Under the existing Stamp Duty rules, there is no liable person or legal obligation for anyone to pay Stamp Duty, with payment of the tax being incentivised through placing legal obligations and consequences on company registrars and by not allowing instruments that are not ‘duly stamped’ to be used as evidence in Court. The consultation considers whether or not the legal obligations and consequences on company registrars should be retained under a new self-assessed tax. However, on balance, the government considers that the obligations placed on company registrars is a useful feature to ensure compliance. It is the government’s intention that the online portal will enable the processing of the tax to be much faster, with the ability to input the transaction, claim relief or pay the tax and for a Unique Transaction Reference Number (UTRN) to be issued immediately. The government proposes that registrars will be able to register ownership upon immediate receipt of the UTRN and that should enable same day registration, vastly improving the system to meet modern business practice and transaction needs.

Compliance

The consultation also contains a section looking at administration of the new single tax. Overall, the proposed design of the compliance regime for any new single STS tax will be broadly the same as the current SDRT regime. However, the government will look to improve upon the current SDRT compliance regime rather than simply replicate it by addressing known issues.

Comments

The consultation is open for comments until 22 June 2023 and these should be sent to sts.consultation@hmrc.gov.uk