Removal of 1.5% SDRT charge

Update: HMRC subsequently published draft legislation for inclusion in the next Finance Bill, in which the provisions dealing with the exemption of transfers of securities appear less restrictively drawn than indicated in the original announcement, which referred to "transfers integral to a capital raising" whilst the draft legislation refers transfers "in the course of capital-raising arrangements". Furthermore, at the Autumn Statement, the government published resolutions to be given temporary statutory effect under the Provisional Collection of Taxes Act 1968 (PCTA) and these included resolutions dealing with the stamp duty and SDRT implications of capital raising arrangements. These amendments will have effect under the PCTA from 1 January 2024, giving effect to the removal of the 1.5% charge described below whilst avoiding the legislative gap between Royal Assent to the Finance Bill and the enactment of REULA (provided that Royal Assent takes place within seven months). In addition, it should be noted that further changes have been made as part of these resolutions including ensuring the preservation of 0% charge in respect of first listings on recognised stock exchanges which do not involve an issuance.

HMRC has announced that the government will introduce legislation in the Finance Bill to formally remove the 1.5% charge to SDRT on issues of shares into a depositary receipt or clearing system. The charge will be removed with effect from 1 January 2024. The removal will also extend to the transfer of shares into such systems when this is integral to a capital raising arrangement and to the issue of bearer instruments.

Background

UK SDRT legislation (FA 1986 ss.93 and 96) provides for a 1.5% charge to SDRT on the issue or transfer of shares or other chargeable securities to a depositary receipt issuer or clearance service. Similarly, UK stamp duty legislation (FA 1986 ss 67 and 70) imposes a 1.5% rate of UK stamp duty on instruments transferring shares or securities to a depositary receipt issuer or clearance service. However, in 2009, the ECJ held in HSBC Holdings Ltd and Vidacos Nominees v HMRC (Case C-569/07) that this charge was contrary to the provisions of the Capital Duties Directive (Directive 85/303/EEC). This was the case whether the shares or securities were issued directly into the system or transferred into the system in connection with a capital raising arrangement. As a result, HMRC accepted that this charge was contrary to EU law and announced that it would no longer impose the charge.  

HMRC also accepted that the same principles applied to the imposition of the 1.5% charge to stamp duty on the issue of bearer instruments.

However, UK legislation imposing these 1.5% SDRT charges was never repealed and taxpayers were required to rely on their EU directly enforceable rights as the basis for not paying the statutory charge, and on published HMRC guidance indicating HMRC continues not to apply the 1.5% charge on issuance and other capital raising. Following Brexit, existing EU rights (including the right not to pay the 1.5% SDRT charge) were retained under the provisions of the European Union (Withdrawal) Act 2018 section 4. However, from 1 January 2024, the Retained EU Law (Revocation and Reform) Act 2023 s.2 will remove any such rights. As a result, the existing retained EU law protection against payment of the 1.5% charge will in principle fall away - although the HMRC guidance indicating it is not applied would continue. This creates an uncertain position regarding whether the 1.5% charge would need to be enforced by HMRC.

Removal of the 1.5% charge on issuance and other capital raising

HMRC has now announced that the government will legislate to remove the 1.5% SDRT charges on issuance of chargeable securities into depositary receipt and clearance systems and also on the issue of bearer instruments. In addition, the 1.5% charge will also be removed on "transfers integral to capital raising".

The measure will also include legislation to remove the 1.5% stamp duty charge in relation to the issue of bearer instruments.

The announcement confirms that legislation will be introduced in Finance Bill 2023-24 and will have effect from 1 January 2024.

Comment

Whilst the announcement is welcome, it does raise some questions from a timing perspective. Whilst the provisions will have effect from 1 January 2024, they will not in practice be enacted until Royal Assent of the Finance Act 2024 - likely in summer 2024. In the period between January 2024 and Royal Assent of the Finance Act 2024, the UK legislative position is that that the 1.5% charge is technically reinstated (albeit that any amounts paid should be reclaimable once the charge is retrospectively cancelled following Royal Assent of the Finance Act 2024). However published HMRC guidance continues to indicate the charge is not applied in practice. In practical terms, it is to be hoped that the charge will not in practice be levied in this interim period, and that market participants and intermediaries will continue taking the practical and pragmatic approach of not applying the 1.5% charge on issuance and other capital raising, despite the technical complexities raised by the timing of the transition.

In addition, the announcement falls short of completely abolishing the 1.5% charges altogether ie a 1.5% charge to stamp duty or SDRT can still apply to a transfer of shares or securities into a depositary receipt or clearing system where this is not integral to a capital raising - for example where an shareholder chooses to convert its shareholding in a UK company from CREST dematerialised form into ADR format. Accordingly there are likely to be some situations in which careful consideration of the rules remains necessary, with perhaps some structuring needed to move shares into depositary receipt or clearance systems through issuance rather than transfer (or by a transfer which is integral to a capital raising).

Thus, while the announced measure is helpful and welcome, it would have been better still (and simpler for the UK's capital markets) to abolish the 1.5% charge altogether.