On 27 April 2023 (and as noted in a previous blog), HM Revenue and Customs (HMRC) launched a consultation on the government’s proposals to modernise the “Stamp Taxes on Shares framework”. Essentially the proposal is to replace Stamp Duty and Stamp Duty Reserve Tax (SDRT) with a mandatory, single tax on transfers of shares and debt with equity-like features.
The consultation stems from a previous 2020 Call for Evidence from HMRC, and also follows the shift – initially introduced in March 2020 as a temporary measure to cater for the COVID pandemic, but since made permanent – away from physical stamping of documents. Despite this transition, HMRC has acknowledged that Stamp Duty, in particular, may be perceived as an anachronistic feature of an increasingly digital tax system because it remains a paper-based regime. The consultation will run until 22 June 2023, and seeks views on:
- whether a single tax on securities should apply in lieu of the current system comprised of both Stamp Duty and SDRT;
- the assessment and administration of any new single tax; and
- key elements of any new tax, including liability, tax base, geographical scope, exemptions and reliefs and compliance.
The consultation does not cover the 1.5% charge to stamp duty that may apply on a transfer of securities to a depositary receipt issuer or clearance service as that will be dealt with in a separate consultation if modernisation is taken forward.
The current framework
Although the consultation pertains to both Stamp Duty and SDRT, it is fair to say that most of the features identified as problematic pertain to shortcomings of the Stamp Duty system. As a basic matter, SDRT applies to agreements to transfer “chargeable securities” and is typically charged at a rate of 0.5% rounded up to the nearest 1p. Although there is overlap in the scope of the two taxes, the SDRT charge is “franked” by any charge to Stamp Duty on a corresponding transfer instrument, so in practice SDRT usually applies to transfers of shares in uncertificated form (e.g., through CREST) and the vast majority of transactions are processed electronically. Stamp Duty is a tax which applies mainly to instruments transferring a beneficial interest in stock and marketable securities, and is most commonly seen as a charge on stock transfer forms (STFs). Although since 2020 instruments are submitted electronically, they must be manually processed by HMRC. Stamp Duty is typically charged at a rate of 0.5% of the relevant consideration for the transfer, rounded up to the nearest £5. It is a voluntary tax, in the sense that the relevant legislation does not designate any liable person; however, a UK company share register cannot be updated if Stamp Duty has not been paid on the transfer instrument, nor can an “unstamped” transfer instrument be introduced in court as evidence of ownership. The “voluntary… but actually not so voluntary” nature of the tax, together with a geographical scope that lacks clearly defined parameters, have historically been a source of confusion for those unfamiliar with the UK stamp taxes framework. Additionally, the timeframe for processing Stamp Duty applications is not guaranteed and turnaround times vary. Although the consultation notes that HMRC aims to deal with 80% of STFs within 15 working days of receiving them but recommends allowing 20 working days, we have seen applications take significantly longer on numerous occasions.
Proposals for change
A single tax: HMRC’s“3 guiding principles” in this review are “simplicity”, “ease of use” and “clarity and certainty”. It is with those aims in mind that the government now proposes a mandatory, single tax on securities in lieu of separate taxes for electronic transfers (SDRT) and paper instruments (Stamp Duty). The tax will be self-assessed, and transactions currently undertaken through CREST will continue to have tax collected via that system, whereas notifications and payments for non-CREST transactions will be processed via a new online HMRC portal. Although the new framework will not offer a statutory pre-clearance system, and will no longer include an assessment and adjudication process (as is currently the case for Stamp Duty), the government will provide access to the non-statutory HMRC clearance service where there are concerns regarding how a transaction ought to be treated for tax purposes. Recognising differences in the ways listed and unlisted shares are traded, and certain valuation complexities that may apply to unlisted (but not listed) shares, the government recognises that there may be certain instances within the new single tax framework where different treatment is merited, but suggests that this should only apply where necessary and appropriate.
Charging point and payment date: In keeping with the single tax approach, the government proposes a single charging point which will apply to all transactions at the “relevant date”. The relevant date will be set at the point of agreement or, if the agreement is conditional, the date on which conditions are satisfied subject to an overall two-year time limit. The payment date will in turn be established by reference to the charging point, with the government proposing a 14-day timeframe for payment for all transactions (as is currently the case for SDRT). This would be a notable shift from the current 30-day timeframe for payment of Stamp Duty.
Liability: The government asserts that “[f]or a modern, self-assessed tax it is necessary to hold somebody liable and accountable for the tax.” On that basis, the government proposes that the purchaser would become liable and accountable for non-CREST transactions, and that the current rules regarding liability (of the purchaser) and accountability (of the purchaser or an intermediary) would be kept in place for CREST transactions. Although the former proposal would introduce a technical requirement not currently part of the Stamp Duty framework, formally imposing liability on the purchaser mirrors what is already typically done in practice.
Link to company registers: Although some may argue that imposing liability for any new single tax removes the need for any link to company registers (i.e., restrictions on the ability to update the register pending stamping), the government maintains that this feature remains important for monitoring and compliance purposes. This requirement has often been a source of frustration where time is of the essence and company books must be updated to progress and/or finalise a transaction. To address this point, which the government has identified as the “main issue” with the current requirement, the government notes that the new online portal should allow for much faster processing, with the ability to submit a transaction, pay the corresponding tax or claim the corresponding relief and immediately receive a Unique Transaction Reference Number (UTRN) that will permit registration of the transfer(s) by the company registrar – ideally all in the same day.
Scope: Highlighting the confusion caused by current Stamp Duty rules (as noted above), the government is proposing to apply universally the existing SDRT rules such that any new single tax applies to securities in a UK company, without regard to where they are traded or where the relevant parties are based. The location of the share register would also be irrelevant to the scope of the new tax. As part of the scope analysis, the government is also considering which types of securities should be caught, noting that the current approach – which includes equity and debt in the first instance, but then permits sweeping carve-outs for “plain vanilla” loans – is perhaps overly complicated. The new approach under consideration would seek only to capture non-government equity in UK incorporated companies, including stock and bonds with equity-like features, thus incorporating the existing carve-outs into the fundamental parameters for the single tax. It is difficult to see how this approach will be simpler that the current exemptions. The government also proposes to state clearly, in the relevant legislation, that the granting of security interests (e.g., to a lender) is out of scope, and separately that partnership interests should be taken out of scope.
Consideration: Prompted by concern that “chargeable consideration” for Stamp Duty purposes (which currently includes cash, debt and stock or marketable securities) may lead to “anomalous exchanges” through which parties use alternative, non-chargeable means of paying for securities, the government proposes to adopt the current SDRT approach of defining consideration as consisting of “money or money’s worth”. This would, however, be subject to specified exceptions for certain types of consideration (e.g., an obligation to pay pension benefits).
There is a separate issue for cases where the exact amount of consideration is unknown when the transaction occurs, because, for example, the value will be determined by completion accounts or potentially subject to adjustment based on a company’s performance or other contingencies. A detailed explanation of the new approach is outside the scope of this blog, but at a high level it is proposed that the government would adopt the existing Stamp Duty Land Tax (SDLT) rules for uncertain and unascertainable consideration as the government asserts that these provide “more flexibility”. By way of contrast to the current system, where a Stamp Duty calculation may necessitate any number of different approaches depending on how the consideration is structured and stated, the SDLT rules generally take a singular approach to uncertain and unascertainable consideration by requiring a reasonable estimate to be paid upfront and, in respect of contingencies, by assuming in the initial calculation that the contingent element will become (or will not cease to become, as the case may be) payable. Adjustments may be made in future to the extent permitted by the rules. Although it is possible to apply for a deferral, this is subject to a 2-year time limit.
Exemptions and reliefs: The consultation includes a number of proposals for exemptions and reliefs. Notably, the government has stated that it would remove the £1,000 (consideration) de minimis which currently applies for Stamp Duty, on the basis that the new online portal would relieve the administrative burden underlying the current exemption. On the other hand, the government proposes to maintain “group relief” in its existing form, albeit with consideration as to whether the applicable anti-avoidance rules can be further clarified for taxpayers. The government has also declared its intention to maintain specified reconstruction and acquisition reliefs, with an intention to provide greater clarity on some of the key concepts in the legislation itself. In addition, the government intends to clarify that all transactions that are in scope, including those that qualify for an exemption of relief, must be notified to HMRC without exception. It is unclear how reliefs which currently need to be adjudicated would interact with the UTRN / company registrar process.
Compliance and penalties: Finally, the government has concluded that the current SDRT compliance regime is best suited to any new single tax, and has included within the consultation document various proposals pertaining to determination assessment times, penalty assessment times and information and inspection powers, each of which mirrors the existing position for SDRT, as well as discovery powers currently available to HMRC for most taxes. The government has also outlined a framework for penalties and interest which again broadly reflects the existing position for SDRT, subject to certain proposed modifications.
As noted above, the Stamp Taxes on Shares consultation remains open until 22 June 2023, following which we would expect HMRC to publish a response in due course. The timing of the introduction of any new regime is unclear.
Please contact a member of the Weil Tax team if you would like further information regarding details of the consultation.