As those who have bought shares in private companies and their advisers will know, the payment of 'stamp duty' - the charge on instruments transferring the beneficial interest in "stock" or "marketable securities" – is a paper based regime. It often results in delays to registration of title to the shares, requiring practitioners to implement complex work-arounds to convey rights before registration can occur. The COVID-19 pandemic may at last be triggering some much needed reform. In March 2020, HMRC announced emergency procedures to avoid the need for hard copy stock transfer forms to be sent for stamping. Instead, HMRC allowed electronic submission of both the stamp duty payment and copy documents. HMRC then generated an email confirmation of receipt of stamp duty and that the stock transfer or instrument of transfer is duly stamped so that the registrar may register the ownership of the shares. This temporary procedure has now been made permanent (albeit that the email confirmation has been replaced by a letter). During 2020 HMRC also issued a call for evidence on potential options for modernisation of the stamp taxes on shares framework stating that "The government is aware that Stamp Duty, as a paper-based regime, is often regarded as an anachronistic feature of an otherwise high performing UK tax system". That call for evidence has now closed and last month, the Government indicated that a working party would be set up to make further recommendations.
Likely direction of travel
Currently the UK has two principal taxes that may apply to shares, debt instruments, options/warrants and other subsidiary interests namely stamp duty and SDRT. The two taxes operate in different ways (as regards liability, assessment and collection), their scope is subtly different and many exemptions for one tax are not available in relation to the other tax. This is unsurprising given that stamp duty reserve tax (SDRT) was introduced in 1986 primarily to combat perceived avoidance of stamp duty whereas stamp duty dates back to 1694.
Accordingly the most likely outcome is that stamp duty will cease to exist and stamp duty reserve tax (probably renamed) will survive, but in a modified form.
These will probably include:
- introducing most if not all of the stamp duty exemptions into the SDRT framework;
- possibly removing the contingency principle altogether (which in essence can impose stamp duty by reference to the maximum possible amount payable under an agreement whether or not it is actually paid) and instead giving statutory support for the long-standing "wait and see" principle. This principle enables stamp duty to be paid by reference to the initial known consideration with an obligation to re-present the transaction for additional tax to be paid if additional consideration contemplated by the document is in fact paid;
- tax appeals are likely not to require payment of the disputed tax before they can be heard and to go before the Tax Tribunals rather than (as is currently the position) to the High Court where stamp duty is concerned;
- there may be tidying up/additional clarification over what instruments are within and outside the scope of the modernised tax – particularly as regards shares and securities and other instruments in foreign companies and transfers of partnership interests where some of the underlying partnership assets include UK shares and debt instruments as well, possibly, as warrants and options;
- it is likely that consequential changes will be made to company law to relating to the obligations on those updating company registers to see duly stamped stock transfer forms (currently being satisfied by the HMRC's confirmation of stamp duty payment) and, either a hard copy or (if permitted) an electronic stock transfer form. Instead it is possible that companies will be permitted to update registers of members without receipt but being under an obligation to notify HMRC if no evidence of tax having been paid is produced within 30 days and without the need for a delay where the "wait and see" principle applies (see above). Indeed the possibility of abolition of stock transfer forms (whether in paper or electronic form) is also canvassed.
Clearly, necessity is the mother of reinvention. The question now is how long reform will take. Further consultation on more detailed proposals will be needed and, even if some measures are brought forward for staged reform, according to the Government "it is not expected that any major legislative change will be made before the Finance Bill 2022".
6 August 2021