| Let’s simplify stamp duty |
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| Business reorganisations are frequent occurrences. Stamp duty and capital duty reliefs are critical to them. These reliefs should be simplified. |
Re-organisations matter
Broadly speaking, stamp duty is a tax on documents that evidence the transfer of property and capital duty is a tax on the increase in capital of limited companies. The latter are known as capital companies. When you want to reconstruct a company by transferring its trade and undertaking into a new company, but keeping it in the same ultimate ownership, it is not uncommon that it should be done by the new company issuing shares in return for the undertaking of the old company. Those shares might be issued either to the old company directly, or, more commonly, to the shareholders in that old company.
Where you wish to amalgamate two businesses, a broadly similar transaction could occur, or one company might issue its shares in return for the shares in an existing company. These are common transactions.
Two taxes apply
As can be seen from their description, they involve the issue of shares, thus potentially attracting capital duty. They also involve the transfer of property and thus potentially attract stamp duty. Because such reorganisations and amalgamations are essential to healthy business life, exemptions are provided from stamp and capital duty so as to facilitate them. But here is the strange thing! The conditions applying to the reliefs are quite different. You can end up qualifying for one relief but not for the other on an identical transaction. This makes no sense.
Conditions differ
The reason historically why the conditions for the two reliefs are different is simple enough. Capital duty is an EU harmonised tax and our legislation has to be modelled on the EU’s requirements. The stamp duty predates the capital duty directive. One can understand why the conditions differ as between the two taxes, but it still doesn’t make sense that they should do so. Lets look at some of the differences in the conditions for the reliefs in a transaction where one company issues shares in return for the shares of another company:
To get the stamp duty relief it is necessary that it should be a bona fide commercial transaction and not one undertaken for tax planning purposes. There is no similar requirement for capital duty.
For stamp duty relief, the company issuing the shares must be EU registered, whereas the corresponding requirement for capital duty relief is that the company issuing the shares be a capital company (otherwise it wouldn’t be liable to capital duty anyway!) and that the target company should have its place of effective management or registered office in the EU.
For stamp duty relief it is necessary that the company issuing the shares should state in its memorandum and articles that its objective is to acquire at least 90% of the issued shares of the target company. There is no similar requirement for capital duty. God alone knows why anybody requires this particular condition to be fulfilled in order to avail of a tax relief!
Stamp duty relief won’t be available to the company issuing the shares if it held more than 10% of the issued share capital of the target company before the transaction. There is no similar requirement for capital duty relief.
The issuing company must take transfers of at least 90% of the issued share capital of the target company, in order to get stamp duty relief on the transfers. However to get capital duty all that is required is that, at the end of the transaction, it should own not less than 75% of the issued share capital in the target company.
For stamp duty relief, the consideration for acquiring the shares must consist as to not less than 90% in the issue of shares. But for capital duty, the cash content cannot exceed 10% of the nominal value of the shares issued in return for the other shares!These sound like identical conditions, don’t they? But they are not. Where 10% of the total consideration being paid for the shares in the target consists of cash you can get the stamp duty relief but may find that the capital duty relief is not available.
The stamp duty relief will be clawed back if the acquiring company disposes of the shares in the target company within two years. The capital duty relief however will be clawed back if the acquiring company doesn’t continue to own at least 75% of the issued shares of the target for the following five years.
Differences are nonsense
Some of the differences between what appear to be identical conditions as between the two reliefs, are traps for the unwary. Almost without exception, many of the stamp duty conditions are meaningless hang-overs from history, serving no valid economic, public policy or taxation objective.
The confusion doesn’t end there. Many of the transactions outlined above are likely to involve taxation of capital gains also. There also reliefs are available, but with yet a different set of conditions applying!
All of this confusion adds to business costs without any benefit to the exchequer. A few hours work by a parliamentary draftsman would pay good dividends here. |
Shaun Murphy is a Tax Partner in KPMG.
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| Article appeared in the May 2000 issue.
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