On 29 June 2023, the Retained EU Law (Revocation and Reform) Act 2023 (the “2023 Act”) was given Royal Assent. The Act provides for the “sunsetting” of certain EU laws and rights retained under the European Union Withdrawal Act 2018 (the “2018 Act”) from the end of 2023.
One of the seemingly unintended consequences of the sunset clause is that, with effect from 1 January 2024, the 1.5% charge to stamp duty or stamp duty reserve tax (“SDRT”) on the issuance of shares and marketable securities of UK incorporated companies into a clearance service (such as the Depositary Trust Company) or depositary receipt service (for example, American Depositary Receipts issued by US depositary banks) is re-applied.
Transfers of shares in a UK incorporated company are generally subject to stamp duty (if effected through a paper instrument) or SDRT (if effected electronically) at a rate of 0.5%. However, a special higher rate of 1.5% also applied on the issue or transfer of UK shares and securities into a clearance or depositary receipt service and was intended to operate as a kind of “season ticket” for entry into the clearance or depositary receipt system, with no stamp taxes applying to subsequent transfers within such systems.
The European Court of Justice held (in what are known as the HSBC and Air Berlin cases) that the 1.5% stamp tax charge was contrary to the European Union Capital Duties Directive in relation to the issue of UK shares or securities and transfers that are an integral part of the raising of capital. HMRC accepted the decisions and published guidance to that effect; however, the legislation applying the 1.5% charge was not repealed and it remains on the UK statute book.
Brexit and the sunset
There was some uncertainty as to the status of the 1.5% charge following the UK’s withdrawal from the EU. However, HMRC confirmed that, as the Capital Duties Directive had direct effect prior to Brexit, the 1.5% charge would remain disapplied under the terms of Section 4 of the European Union Withdrawal Act 2018 and this would remain the position “unless stamp taxes on shares legislation is amended”.
However, Section 2 of the 2023 Act now provides that Section 4 of the 2018 Act is repealed at the end of 2023. As a result, with effect from 1 January 2024, it would seem that the 1.5% charge will apply once again. This appears to contradict HMRC’s previous comments that the 1.5% charge would remain disapplied “unless stamp taxes on shares legislation is amended” and is also surprising given the 1.5% charge was expressly excluded from the scope of HMRC’s recently announced consultation on the government’s proposals to modernise the stamp taxes on shares framework (discussed further in a previous blog).
The reintroduction of the 1.5% stamp duty charge is unexpected and goes against the grain of other measures seeking to attract investment in the UK. It is hoped that HMRC will make an announcement sooner rather than later and the issue will be addressed by way of legislative amendment before the end of year “sunset” clause takes effect.