Call of Duty: The proposed reform of UK stamp taxes on shares

HMRC’s recently-launched Stamp Taxes on Shares modernisation consultation gives welcome new impetus to the much-needed reform of the UK securities transfer taxes, stamp duty (SD) and its dematerialised equivalent stamp duty reserve tax (SDRT).

The consultation follows a 2017 report on reforming, digitising and simplifying SD by the Office for Tax Simplification and a 2020 HMRC call for evidence on modernising the stamp taxes on shares framework. 

Significantly, it outlines the Government’s policy-based preferences on a wide range of modernisation proposals and thus indicates the likely aims and contours of a new regime: the amalgamation of SD and SDRT into a single, digitised and rationalised tax on securities transactions. Although considerable uncertainties remain, the consultation covers a lot of ground and the direction of travel is generally positive for taxpayers involved in UK corporate transactions and their advisers.

The proposed new single tax would apply to agreements to transfer “non-government equity”, including stock and bonds with equity-like features, in UK-incorporated companies. This approach to the tax base would, if implemented, represent a real simplification of the current overlapping regimes.

Complexities inherent in SD as a documentary tax, including identifying the relevant physical instrument of transfer (usually, but not always, the stock transfer form), the relevance of place of execution and document retention, and the need to submit the instrument to HMRC for adjudication, should all disappear. The at-times complicated separate exemption for non-equity-like loan capital should no longer be needed. Although “familiar concepts will be used where appropriate”, nineteenth-century statutory definitions could be updated to reflect modern commercial realities. The location of the share register, which poses complexities in a digital age, would cease to be relevant with a scope set solely by UK incorporation. Explicit exclusions from the tax would include transfers of partnership interests, grants of security interests and (in line with the position for SDRT) grants of call options and warrants.

Many of the key features of SDRT would be adopted for the single tax on securities. Consideration would be defined as “money or money’s worth”, subject to certain sector-specific exclusions (see below). The new tax would be mandatory, in place of the voluntary but sanctions-backed SD regime, and self-assessed rather than being assessed by HMRC.

Non-statutory clearances would remain available, as for SDRT, a near-necessity in more complex fact patterns such as IPOs (where various thorny issues collide). The due date for accounting for the tax to HMRC would be 14 days from the charging point, meaning an acceleration from the current SD timetable of 30 days but minimal changes to current SDRT systems in CREST (the UK CSD), while CREST brokers will continue to account for the tax on behalf of their clients.

For transactions settled outside CREST, a new online portal would be opened for notification (including of transactions that benefit from relief) and payment of the tax, following which a unique taxpayer reference number (UTRN) would be issued for forwarding to share registrars. A revamped compliance regime would also broadly follow the SDRT processes although enhanced “discovery” powers for HMRC may prove controversial.

Innovatively for stamp taxes on shares (but inspired by stamp duty land tax), a deferral mechanism for contingent or unascertained consideration would permit deferral in certain circumstances for up to two years. One suspects consultation feedback will cause the suitability of this period, for example in earn-out scenarios, to be reconsidered.

The proposals would also involve a streamlining and rationalisation of reliefs in a manner generally beneficial to taxpayers. The absence of group relief from the SDRT regime is a quirk which requires time-consuming work-arounds while the dated anti-avoidance provisions in SD group relief can be hard to explain to clients signing the application. These issues would be addressed in an equivalent relief from the single tax on securities. Stock lending and repurchase relief, reconstruction and acquisition relief and the growth market exemption should all remain available on a broadly equivalent basis.

New reliefs will be considered to ensure that the new definition of consideration does not inadvertently bring common currently-exempt pensions and insurance sector-specific transactions into the new charge. In one of the few adverse proposals, the current £1,000 de minimis exemption in the SD regime will be removed on the basis that its rationale, reducing HMRC’s administration burden, will no longer apply. Taxpayers or advisers with good arguments in favour of its retention should respond to the consultation!

This rationalisation of the tax base and streamlining of procedure and relief should increase transactional certainty and save time. The private funds sector, in particular, will be thankful if offshore execution ceases to be a relevant consideration as this point arises regularly in practice.

Partnership interests (in partnerships holding non-government equity) are also envisaged as being taken out of scope of the new tax, subject to anti-avoidance legislation preventing their use as a tax avoidance technique. This scoping includes the vexed issue of contributions to existing partnerships which involve payments to existing partners for the transfer of an interest.

As always with partnerships and tax, achieving this aim is unlikely to be straightforward and advisers are likely to provide feedback to the consultation and, in due course, on the draft anti-avoidance legislation.

One of the main differences in practice would be the UTRN enabling same-day register updates for non-CREST transactions, bringing an end to the use of declarations of trust as a work-around and easing (for example) the satisfaction of lenders’ security requirements in financings.

Of course the proposal that many investors and industry groups would prefer – total abolition or, at least, a reduction in rate from the existing 0.5% to the lower rates prevalent in competitive jurisdictions – is conspicuous by its absence. Stamp taxes on shares raised £4.4bn in 2021/2022 (SDRT: £2.9bn, SD £1.5bn) and this is not revenue that the UK Government is inclined to give up.

There are other notable and disappointing absences from the consultation, including the problematic 1.5% “season ticket” charge on transfers into non-UK clearance services and depositary receipt issuers.

The devil will very much be in the detail, should the consultation progress to the drafting stage, and producing functioning tax legislation without inadvertent losers is likely to prove extremely difficult. But the package of reforms on offer potentially represents a genuine functional improvement on the existing regime and is a process with which taxpayers and their advisers will be keen to engage.