Making stamp duty ‘assessable’ rather than ‘voluntary’
Currently, there is no legal obligation to pay stamp duty (as opposed to stamp duty reserve tax (SDRT)) and so it is often only paid where this is a requirement in order to be able to use the document in the UK. The two main situations where this comes up in practice are where the transfer cannot be registered in the UK if any stamp duty due has not been paid, or where the transfer document is to be relied on in a UK court (where again it must be properly stamped). Consequently, HMRC does not currently have extensive powers to enforce the collection of stamp duty. One area highlighted by the OTS where the voluntary nature of stamp duty is most apparent is the current practice of not stamping transfers of partnership interests, despite stamp duty applying in principle to the transfer of interests in partnerships which own stock or marketable securities. The OTS’s recommendation that stamp duty be digitised, combined with SDRT and made assessable (i.e., making it compulsory to pay this stamp tax where it applies) will have the potential to change this position. It also recommends that this be enforced by giving HMRC the information and enquiry powers to allow the imposition of interest and penalties where insufficient payments are made. As such, this clearly has the potential to be a revenue raising measure.
Considering the extent to which stamp duty is payable on transfers of partnership interests
The OTS has recommended that HMRC consider, as a policy matter, the extent to which stamp duty should be payable on instruments transferring partnership interests and has suggested that “making stamp duty an assessable tax could increase the amount of tax collected in relation to partnership interests.” This will impact secondary transactions, but also LP and GP transfers and general fund reorganisations as it is not currently compulsory or market practice to get transfer documents stamped and to pay the stamp duty on transfers of partnership interests.
It has also been recommended that the territorial scope of stamp duty be narrowed from the current position (which applies broadly to UK limited partnerships or, for non-UK limited partnerships, where there is ‘anything done’ in the UK) to exclude non-UK shares and securities from its remit. This ought to result in the exclusion of partnerships holding only non-UK shares, although the OTS merely recommends that the policy on this should be considered. If this change is made, it would significantly reduce the impact of any new rules for funds who invest through non-UK holding companies and not directly into UK shares and securities. This would be a sensible clarification to make, as presumably any new rules would have to apply equally to both English law and non-English law partnerships.
Contributions of assets and distributions in specie
The OTS highlighted in its report additional areas of complexity which could be simplified, including the current definitions of ‘consideration’ for stamp duty and SDRT. There are some types of transactions where under the current definitions there is no ‘consideration’ within the scope of stamp duty. The OTS gave certain examples of such transactions, which included contributions of assets to partnerships and distributions in specie from partnerships.
The OTS has recommended that the definition of ‘consideration’ for the purposes of stamp duty be aligned with that under SDRT (namely, the concept of ‘money or money’s worth’) and that the government should consider these transactions as a matter of policy, which seems to suggest a recommendation that such transactions could be brought into the stamp duty net.
If this approach is adopted by the government, it could result in a charge to stamp duty in the case of such contributions or distributions in specie unless a specific exemption is introduced.
The report does not indicate timing or next steps in relation to the OTS’s recommendations as these will be matters for the government. It seems unlikely that anything will happen immediately, particularly given that the government and legislators will presumably have their hands full over the coming months dealing with Brexit. While it is unfortunate that the OTS has not suggested the abolition of what is, in effect, a tax on doing business using UK entities, it is clear that an overhaul of the stamp duty regime is long overdue and we would expect the government to give serious consideration to the OTS’s proposals.