Do we still need a tax that involves physically stamping stock transfer forms? Indeed, do we need stamp duty on shares at all? Steven McGrady considers the alternatives.
Necessity is the mother of invention. This saying is apt for the recent temporary measures introduced for stamp duty during the current economic turmoil. Arguably, the measures are a better way of doing things on a permanent basis and should form the basis for a radical and overdue revision of this 300-year-old tax.
Stamp duty - temporary suspension of need to submit physical documents within 30 days
On 25 March, HMRC announced a temporary change to the way stamp duty is handled in order to help businesses impacted by the COVID-19 situation. Instead of the usual procedure of submitting physical documents for stamping, people can for the time being email details of the transaction and pay any duty electronically. These measures are welcome and proving helpful to businesses and their advisers, who may have difficulty obtaining and submitting original documents in the current circumstances. The speed with which these expedient measures were introduced by HMRC begs the question though - why have such steps not been taken before now to modernise the tax?
For years, people have been suggesting that stamp duty should be modernised. Arguably, the modernisation of the tax on land transactions by the introduction of SDLT in FA 2003, which removed the need to stamp conveyances and leases, was itself somewhat overdue. Why then, some 17 years later, has nothing similar happened with stamp duty on documents which transfer shares?
OTS recommend the modernisation in 2017
Comparatively recently, in July 2017, the Office of Tax Simplification (OTS) published a report that was presented to Parliament after consultation with interested parties. This recommended a reform to simplify stamp duty on shares. It pointed out that the current procedure for stamping, which began in 1694, has now become “anachronistic and cumbersome”.
In particular, the report highlighted the difficulties caused by the time it takes to get documents stamped. In 70% of cases, documents are either stamped within five working days, or 15 working days where the transaction is more complex and a relief is required. This means that in 30% of cases (approximately 30,000 documents a year), the process takes longer than 15 working days. Is that reasonable nowadays?
In fact, recently, people have been finding that stamping could take considerably longer than that; sometimes two months or more, where adjudications for relief are needed. The problems are compounded by documents becoming lost in the post or sometimes at HMRC. These delays can cause real practical problems where share transfers need to be registered quickly. Although workarounds are sometimes possible, the techniques involved are cumbersome and they are not effective in all cases.
Common sense should prevail for stamp duty
As a result of this, the OTS report recommended moving stamp duty online to speed up the process. They suggested that taxpayers should be provided with a unique transaction reference confirming that the transaction has been notified to HMRC (replacing the stamping machines) and that registrars should be able to write up a company’s books on sight of such a transaction reference or confirmation of notification. Neither of these things have happened.
With the experience of the alternative arrangements which have recently been introduced, common sense will hopefully prevail and there will be a move towards the permanent modernisation of the process. We recommend that stamp duty is brought within a self-assessment regime, enabling share transactions in private companies to be regulated by stamp duty reserve tax (SDRT) with suitable adaptation. This was something that we strongly advocated for in our consultation response to the OTS. It would smooth the passage of transactions in private companies, while immediate action by HMRC to approve electronically would be unnecessary because of their enquiry powers.
Do we need stamp duty at all?
We would go even further and suggest that consideration is given to a more radical reform to abolish stamp duty shares altogether. The government came very close to doing this 30 years ago. In 1990, enabling legislation was enacted for the abolition of stamp duty and stamp duty reserve tax in relation to securities from a date to be fixed by statutory instrument. These provisions were never brought into effect, but over the period since then abolition has been the subject of lobbying, with a number of reports suggesting that abolishing the charge would improve the liquidity of share transactions. See for example chapter 4 of the first FISCO report of 2006 where I argued for this myself.
Together with our European colleagues we have recently compiled a report on stamp taxes on transfers of land and shares in 23 European countries. It is apparent from this that most European countries do not levy stamp duties on documents transferring shares, although a number now impose a tax on certain financial transactions to address market instabilities as well as to raise revenues. So far the UK government has strongly resisted the calls by Europe to introduce a similar financial transaction tax, but the continued operation of stamp duty on shares contradicts this approach.
Potential benefits of abolition of stamp duty on shares
Such a move would not be unprecedented. In fact, the Finance Act 2014 abolished stamp duty and SDRT on transactions in shares listed on the London Stock Exchange's AIM and other "recognised growth markets", such as ISDX. Abolishing the duty on the transactions that take place on the LSE and in private companies would cost the Exchequer initially, but the potential benefits could include:
increased competitiveness of the UK stock exchange versus other alternative exchanges in Europe (particularly important post-Brexit)
improved liquidity in stock dealing
reduced costs to stressed pension funds following the recent market crash.
These upsides would surely more than outweigh the lost revenue from stamp duty.
The unusual state of the UK
Comparison with other systems is illuminating, as the UK and Ireland are unusual in having stamp duty on share transactions. We have compiled a database showing an outline of some of the key transfer tax rules in other European jurisdictions.