An old-fashioned tax?

Times have changed. Rates have increased. In 1998/99, Stamp Duty brought in more to the Exchequer than Capital Gains Tax, Inheritance Tax and Petroleum Revenue Tax combined. Stamp Duty is a soft target. It is easy and cheap to collect, UK rates are still significantly lower than the EU average and, most importantly, increases do not attract the same bad press as most other taxes.

Much of the speculation about Budget changes has concentrated on the boom in the residential property market in the South East and expected increases in rates for expensive property purchases. However, changes will not only affect those fortunate enough to be buying town houses in Kensington. Businesses, large, medium or small, will feel the impact.

Property costs are the biggest category of expense for many businesses. The Budget is likely to add to these costs on at least two fronts – an increase in the rate of stamp duty on purchase or lease of commercial property, and the prevention of perceived tax avoidance by imposing the higher rate of duty (currently 3.5%) on the purchase of shares in property rich companies (presently only subject to 0.5% duty).

The rapid growth in e-commerce has already had an enormous influence on the way in which businesses do deals. This has been recognised in ‘The Electronic Communications Bill 1999’ which is currently going through Parliament. This will allow electronically signed or certified documents to be admissible in evidence. These proposed changes raise fundamental questions about the operation of stamp duty. It might be anticipated that the tax will ultimately move from an old-fashioned tax based on instruments to a modern tax based simply on transactions – casting the stamp duty net much wider and cutting out many of the common planning techniques. Share purchases are already subject to such a tax – ‘Stamp Duty Reserve Tax’ (SDRT). However, extending SDRT to other property transactions would present practical difficulties for the Inland Revenue.

Recent changes in Stamp Duty have all been in one direction. There is a strong case for the improvement of reliefs for businesses, especially where there has been no change in the ultimate ownership of the property concerned. Current exemptions for reorganisations are very narrowly drafted and are of little practical use, and there is no relief from Stamp Duty on incorporation. Surely the Chancellor could afford to remove this particular burden on business.

Stamp duty may not make the headlines on budget day, but businesses would be well advised to keep a keen eye on the small print. Watch this space.

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