Sunset on (some) Stamp Taxes: HMRC confirms 1.5% charge on issuance and capital raising transfers to depositary receipt and clearance systems will not apply

HM Revenue & Customs (“HMRC”) has published a policy paper, accompanied by draft legislation, which confirms the removal of the 1.5% charge to stamp duty and stamp duty reserve tax (“SDRT”) on the issuance of UK shares into depositary receipt systems and clearance services, and on certain related transfers. The measure will have effect from 1 January 2024.

This will be welcome news to UK companies hoping to fund raise in the capital markets, as well as businesses involved in the issuance or transfer of securities into depositary receipt systems or clearance services, who have, since June, been in a period of uncertainty as to the future transfer tax costs of issuing (or transferring) shares to a depositary receipt system or clearance service.

Background

Transfers of shares in a UK company are usually subject to stamp duty (where concluded by way of an instrument of transfer) or SDRT (if concluded electronically), in each case, at a rate of 0.5%. However, a higher rate charge of 1.5% arises in respect of transfers of UK shares to a depositary receipt system or clearance service.

Following the decisions of (i) the ECJ in October 2009 (case: HSBC Holdings PLC and Vidacos Nominees Ltd v Commissioners for HM Revenue & Customs (C569/07)) and (ii) the FTT in March 2012 (case: HSBC Holdings PLC and the Bank of New York Mellon Corporation v Commissioners for HM Revenue & Customs (TC/2009/16584)), HMRC has for several years accepted that the imposition of the 1.5% charge on issuances of securities into depositary receipt systems and clearance services, and on transfers integral to capital raising, was incompatible with the European Union Capital Duties Directive, and published guidance stating that it would not seek to collect any such tax. However, the UK legislation imposing the 1.5% charge was not repealed.

In anticipation of the UK’s exit from the European Union on 31 January 2020, the European Union Withdrawal Act 2018 (the “2018 Act”) was introduced to provide legal continuity by transposing directly-applicable (already existing) EU law into domestic legislation. Section 4 of the 2018 Act had the effect of continuing to disapply the 1.5% charge, with HMRC updating its guidance to state that “this will remain the position unless stamp taxes on shares legislation is amended”.

Despite this, on 29 June 2023, the Retained EU Law (Revocation and Reform) Act 2023 (the “2023 Act”) was given royal assent, repealing certain provisions of the 2018 Act including section 4 which had the effect of reintroducing the 1.5% charge from 1 January 2024. This meant that the UK government was required to amend its domestic legislation in order to maintain an effective 0% charge on a permanent basis.

Policy Paper/Draft Legislation

This morning, the eagerly anticipated policy paper on the application of the 1.5% charge (and draft legislation amending the underlying domestic legislation) has been published by HMRC, which confirms HMRC’s intention to maintain  the current status quo The policy paper confirms that no 1.5% charge will apply to share issuances to a depositary receipt system or clearance service, or to related transfers in the course of “capital raising arrangements”. In addition, there will be no 1.5% (or 0.2%) charge to stamp duty arising in relation to the issue of bearer instruments.

Legislation will be introduced in the Finance Bill 2023-24 to enact these changes to the underlying domestic legislation which currently imposes the historic 1.5% charge. The amendments will apply from 1 January 2024 – being the first date that the 2018 Act is officially repealed pursuant to the 2023 Act.

As expected, the SDRT legislation will be amended such that there will be no charge to SDRT on the issuance of relevant chargeable securities. In respect of transfers of such securities, the relevant sections of the legislation include an exemption for “exempt capital-raising instruments” (in respect of stamp duty) and “exempt capital-raising transfers” (in respect of SDRT). In order to fall into the relevant exemptions, one of two conditions must be met:

(1) the transfer must be in the course of capital-raising arrangements; or

(2) the transferor must (i) have acquired the securities before or in the course of capital-raising arrangements; (ii) have been prohibited from transferring the securities in the course of the capital-raising arrangements; and (iii) transfer the securities as soon as reasonably practicable after the time at which the prohibition ceases to have effect.

“Capital-raising arrangements” is defined in the legislation as meaning “arrangements pursuant to which relevant securities are issued by a company for the purposes of raising new capital”.

Comment

This measure will provide legislative certainty to UK companies (and their investors) that going forward there will continue to be no 1.5% charge to stamp duty or SDRT on the transactions described above.

It also ensures that the UK will remain a competitive capital markets jurisdiction and will not be disadvantaged as against its European counterparts.

In the usual way, the UK government has provided draft legislation for technical consultation, in order to allow affected parties to provide comments. The consultation will run for 4 weeks and will close on 12 October 2023. We expect that comments will largely focus around the scope of the disapplication of the 1.5% charge in respect of transfers, namely, what is meant by “the purposes of raising new capital”. In addition, clarity is likely to be sought in respect of the second condition for exempt capital-raising instruments and transfers, regarding the time-limit for transferring shares into a depositary receipt system or clearance service following the removal of applicable prohibitions. Depending on the outcome, investors may be required to transfer their shares earlier in the process than they otherwise would have to ensure that the 1.5% charge does not apply.

Goodwin’s tax team will be continuing to keep a close eye on developments, and would be happy to discuss any of the above further with you.