Higher rate UK stamp tax charge on entry of securities to clearance services/depositary receipt systems: status quo maintained?

The UK tax authority, HMRC, recently published draft legislation that aims to ensure that the sunset provisions in the Retained EU Law (Revocation and Reform) Act 2023 do not inadvertently reintroduce a 1.5% stamp duty/SDRT charge on the issue and certain transfers of shares and securities of UK incorporated companies into a clearance service or depositary receipt system – but does the draft legislation actually maintain the status quo?

Evolution of the 1.5% charge

Transfers of shares and certain non-vanilla debt securities in a UK company (“chargeable securities”) are generally subject to UK stamp duty (if certificated) or SDRT (if held electronically, e.g. through CREST) at 0.5%.

The higher rate 1.5% charge was introduced for the issue or transfer of chargeable securities into a clearance service or depositary receipt system – the idea being that subsequent transfers within the clearance service or depositary receipt system would not attract any stamp duty/SDRT – and so the 1.5% charge was a “season ticket” for entry. It is routine for listed debt to be held in clearance systems, and it is also common to find that shares need to be held in a clearance system or in depositary receipt form in order to trade on a non-UK stock exchange.

However, following a series of EU law cases, HMRC accepted that it would no longer seek to apply the 1.5% charge when chargeable securities were (i) issued to a clearance service or depositary receipt system, or (ii) transferred into a clearance service or depositary receipt system where the transfer was “integral to the raising of capital” by the company concerned. This was on the basis that the charge was not compatible with Article 5 of the EU Capital Duties Directive. Importantly, however, the UK’s domestic stamp duty and SDRT legislation was not amended to reflect this position: its legislative basis was simply the overriding effect of the European Communities Act 1972.

Following Brexit, the 1.5% charge continued to be disapplied (to the extent set out above) under section 4 of the European Union (Withdrawal) Act 2018, which preserved certain “retained EU law” as it stood immediately prior to the end of the transition period. However, the Retained EU Law (Revocation and Reform) Act 2023 now imposes a sunset of 31 December 2023 on the effect of section 4. So absent further legislative action, the 1.5% charge would be reintroduced on 1 January 2024. It was not at all apparent that this was intended, and so a period of uncertainty ensued during which it was unclear whether the government would take action to maintain the existing position.   

Draft legislation – status quo maintained?

The recent publication of draft legislation for consultation helpfully confirms the government’s intentions. The proposed measure “maintains the status quo that is currently underpinned by the direct effect of retained EU law”. The draft legislation would amend the existing legislation in two principal ways:

• it would entirely repeal the 1.5% charge on any issue of chargeable securities; and
• it would provide a new statutory exemption from the 1.5% charge on transfers of chargeable securities “made in the course of capital-raising arrangements” (or, where securities are subject to a transfer prohibition, a transfer made as soon as reasonably practicable after the prohibition is lifted, as long as the securities were acquired before or in the course of the capital-raising arrangements).

The complete repeal of the 1.5% charge on issues to a clearance service or depositary receipt system is clear in the draft legislation, and reflects the existing HMRC position.

However, the framing of the new legislative exemption for transfers is more nuanced. This exemption would only be available if there are “capital-raising arrangements”, defined in the draft legislation as arrangements under which securities are issued for the purpose of raising new capital. Where there are such capital-raising arrangements, the exemption would apply to transfers “made in the course of” those arrangements. This should mean that in circumstances where a non-UK share listing involves an element of primary issuance (i.e. capital-raising), the exemption applies to the transfer of existing shares into a clearance service or depositary receipt system alongside that primary issuance. It is frequently a requirement to obtain the listing that all of a company’s issued shares should be held in a clearance service, meaning that existing shares need to be transferred into the clearance service, regardless of whether they are being retained or sold as part of the listing.

This requirement for a capital-raising means that the proposed new legislative exemption from the 1.5% charge for transfers does not align fully with the existing position. In particular, in Air Berlin the CJEU held that, on the transfer of existing shares to a German clearance service in the context of a listing of shares on the Frankfurt stock exchange, the fact that no new capital was raised did not prevent the transaction from falling within Article 5 of the Directive. The Stamp Office has previously accepted that the 1.5% charge does not apply in similar circumstances where there is no raising of new capital – for example, this can be the case on dual listings or where the listing is to effect an exit from an investment.

If the status quo is genuinely to be maintained, the new legislative exemption from the 1.5% charge for transfers should align with the CJEU’s approach in Air Berlin. In particular, it would need to be available in circumstances where there is a transfer of legal title in shares to a clearance service or depositary receipt system for the purpose of listing those shares on a stock exchange, but there is no associated capital-raising arrangement.

Draft legislation – timing issues

From a practical perspective, the proposal is for the legislation to be included in the Finance Bill 2023–24 and have effect from 1 January 2024 so as to dovetail with the timing of the sunset provisions in the 2023 Act. However, the usual legislative cycle would involve introducing the Finance Bill to Parliament in late autumn, with royal assent only being achieved at some point early the following year. This means there will be a period of time (from 1 January 2024 until the Finance Bill receives royal assent) where, strictly speaking, the 1.5% charge will be re-introduced – although it would then be removed again with retrospective effect under the new legislation. It is assumed that HMRC would not seek to collect the 1.5% charge in this period, but confirmation on this point would be helpful.

There is an added uncertainty for this particular Finance Bill cycle, in that it is entirely possible that a general election might be called in early 2024. If that happened, then it could be that legislative progress for some or all of the Finance Bill is interrupted. It is not yet clear what position an incoming Labour government would take on this issue.

Next steps

The publication of the draft legislation is a welcome development in terms of indicating that the UK government is aiming to maintain the status quo regarding the 1.5% charge. However, based on our experience and as discussed above, the newly legislated exemption for transfers would represent a material narrowing of the existing position – it is unclear if this is a deliberate policy decision. The draft legislation is open for a short period of consultation until 12 October 2023.

If you would like to discuss any of the issues raised in this blog post or would like assistance in responding to the consultation on the draft legislation, please get in touch with the authors or your usual Freshfields contacts.