When I heard in the pre-Budget report that a technical advisory group was to be set up to look at stamp duty I thought that at last this area of tax law was to be brought into the 21st century.
Sadly, it was not to be. The scope of the is restricted to certain areas related to e-commerce: important, and well worth studying, but it is high time there was a more fundamental review of the whole of stamp duty and stamp duty reserve tax.
The law on stamp duty was last consolidated in 1891, and the world of business has moved on since those days. Transactions which are dealt with inadequately by the 1891 legislation are now far more important than they were a century ago.
My favourite conspiracy theory is that the first round of increases to stamp duty under this government arose because somebody forgot to draft a paper on inheritance tax. So to fill in the hole in the Budget arithmetic, rates of stamp duty were increased. When Gordon Brown realised that this was a remarkably efficient way to raise extra revenue (stamp duty has the lowest collection costs of any of the major taxes), and what was more could be portrayed as primarily hitting ‘fat cats’ who lived in expensive houses, the temptation to keep raising rates could not be resisted.
Unfortunately the main impact of stamp duty is on businesses, and at the current level of four per cent for asset transfers it is starting to distort decisions such as whether to dispose of assets or shares. If the current consultations on corporate capital gains and intangibles continue on their present lines, the tensions will increase still further with vendors being able to roll over gains on shares but purchasers able to depreciate acquisitions of goodwill for corporation tax purposes. A further sign that stamp duty is reaching levels which businesses consider unacceptable is the increase in the number of planning ideas now being generated.
So what could be done to improve matters? A radical approach would be to have different rates for conveyances of business and non-business assets, with a reduced rate for the transfer of assets used in a trade. As a minimum, exemptions should be aligned to those for corporation tax and tax on chargeable gains: for example, there is no exemption from stamp duty on the incorporation of a business.
Prior to Finance Act 2000, this difficulty could be avoided by gifting assets and claiming gift relief for capital gains tax purposes, but this route is no longer available for transfers of land – a real elephant trap for the unwary. On reorganisations, there are reliefs available under Finance Act 1986, but these are narrowly drawn; they may also be inconsistent with European law since they still require the companies involved to be UK companies.
As far as transfers of shares and securities are concerned, the exemption promised ten years ago in Finance Act 1990 has not materialised. Bearing in mind the consolidation of stock exchanges in the EU, failure to abolish the duty on quoted shares could have the effect of driving business out of the UK as falling rates of dealing commission make the 0.5% stamp duty charge look increasingly expensive.
Another problem relates to earn-outs, which are covered by the ‘contingency principle’. If an earn-out states a maximum figure, which it may well do for commercial reasons, then duty is payable on that maximum – even if the likelihood of its ever being payable is remote. The capital gains tax treatment is more straightforward, and there seems little reason to continue to charge stamp duty on sums greatly in excess of the initial consideration.
Last but not least, the administration of stamp duty needs a thorough overhaul. Stamp duty has its own special penalty regime, and in some circumstances both interest and penalties can be imposed even where there has been no fraud or neglect. The need for a statutory declaration to claim relief for transfers between associated companies was archaic and an unnecessary compliance burden: the change to a straightforward letter of claim announced earlier this year was a step in the right direction.
However, the appeal procedures are still out of line with those in other areas. Stamp duty is now a major revenue raiser for the government, and it seems unlikely that this trend will be reversed.
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