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Stamp duty problems Back  
Recent discussion of possible changes to stamp duty seems to have been focussed more on election year issues than on the real problems that stamp duty gives rise to. The focus on residential property diverts attention from the problems which stamp duty can cause to the business community.
Stamp duty is our second oldest tax, after customs duty. It dates from at least the reign of King Charles II. It has problems, but it must be admitted that it also has merits. It, to one degree or another, meets three of the four tests to which any tax must be subjected.
Conor O'Brien

• It is relatively easy and cheap to collect
• It is principally levied on those with the ability to pay it
• It is levied principally on transactions involving cash payments

Unfortunately, it can have the effect of discouraging legitimate transactions, due to the 9p.c. rate that can typically apply to sales transactions

Any significant reduction in stamp duty as it applies to residential property is likely to be reflected in a broadly equivalent increase in the market value of residential property. It should therefore neither benefit or disadvantage the small minority of voters who at any time are in the market to purchase property attracting stamp duty, but it should enhance the ‘feel good’ factor for the very large number of voters who own property. It has obvious election attractions, but arguably is an approach better applied at a time when the property market might be troubled, than when it is booming.

The top rate of stamp duty, 9p.c., was introduced largely to attempt to ‘cool’ residential property market some years ago. It has been retained because it has become a valuable source of taxation revenue. Unfortunately, it impacts not only on residential property sales but also on many business transactions to which such a high rate is totally inappropriate. This aspect has not attracted political attention. Businesses don’t vote.

Transferring business assets
Stamp Duty is a tax on documents rather on transactions. It does not apply to a transaction that can be carried through without the use of a document to transfer title. There are three business assets which it is difficult to transfer in a commercially acceptable way, without the use of a document. These are premises, goodwill, and debts. There is a limited exemption from stamp in respect of sale of debts, but it does not apply in all circumstances. A 9p.c. stamp duty on the transfer to a business of premises or goodwill or debts is an addition to the cost of carrying on business that is unjustifiable. Our philosophy, on which our prosperity is based, has been to minimise the tax cost of doing business in Ireland. That philosophy is only partially reflected in stamp duty. The level of ‘dead cost’ which stamp duty represents in these transactions can inhibit transactions, something which a good tax should never do.

The normal growth process of a small business is to start as a sole trader, or partnership, and, on expansion, to incorporate as a company. This process is encouraged by tax breaks which try to ensure that there are no adverse effects from the view point of capital allowances or capital gains tax on the incorporation of a business. Unfortunately, incorporation almost invariably attracts stamp duty. Where shares are issued for consideration other than cash, there is a form to be lodged in the companies office, and that form is made subject to stamp duty, at a rate that can be as high as 9p.c.. The stamp duty imposed on the incorporation of a business is a major obstacle to incorporation, and to the growth of the small business. It represents a penal cost which a small expanding business typically cannot afford to carry as a dead weight.

The Financial Services Industry
The Financial Services Industry has long been seen as a ‘soft mark’ for stamp duty. The notorious bank levies, which are little better than fiscal bank raids, take the form of a stamp duty.
The stamp duties levied on the issue of cheques, and on the issue of credit cards and laser cards have a definite impact on the development of ‘non-cash’ commerce and electronic banking in Ireland. They have ensured that Irish people are likely to hold the least number of cards per capita in any developed country. Once again, stamp duty operates to inhibit legitimate transactions, which is the hallmark of a bad tax.

Scope of tax
Stamp duty is charged principally on documents executed in the State, or which relate to property in the State, or to things to be done in the State. The latter two bases seem reasonable enough. They create a sensible connection between Ireland the tax Ireland seeks to levy. But the charge in respect of documents executed in Ireland, which do not relate to Irish property or to anything to be done in Ireland, seems on the face of it more likely to discourage the carrying out of a transaction, than to raise any tax. It is almost as if we did not want documents to be executed in Ireland.

Ireland is one of the world’s most globalised and open economies. Our financial services sector in particular to a large extent is concerned with international transactions rather than Irish transactions. While there are many exemptions for specific types of transactions which the financial services industry may engage in, the levying of tax on a document executed in Ireland in which there is no other reference to Ireland, seems particularly inappropriate to a country wishing to develop an international financial services industry, or indeed an international economy.
It is downright embarrassing for a tax advisor to have to suggest to a client in the a waste of resources for financial services industry that they companies to have to take a document up to Newry to execute it, merely to avoid a penal, but ill-considered, charge to tax. What would we do without Partition? Surely it’s time to reconsider this silly charge.

The rate structure
The rate of stamp duty on conveyance on sale ranges from 1p.c. to 9p.c.. The applicable rate depends on the total consideration (on an arm’s length basis) passing in the transaction. Whereas income tax operates on a progressive basis, with the 20p.c. rate applying to a lower band of all income, and the 42p.c. rate applying to the band of income above that lower band, stamp duty operates on a ‘all or nothing’ basis. If you are one euro above a particular limit, the entire consideration attracts the higher rate of stamp duty, and not merely the amount of consideration that exceeded the particular limit. The result can be that, in theory, an additional one euro’s consideration can cost in excess of ?50,000 additional stamp duty. Not surprisingly, transactions for considerations that are close to the amount at which stamp duty rates change become difficult to negotiate.

It would not be a difficult task to recompute stamp duty rates on a normal progressive basis, so that higher rates apply only to higher bands of the consideration, and not to the entire consideration, and to do so on a revenue-neutral basis. A few days’ review of the statistics, and some test calculations, should come up with a rational system. Unfortunately, there does not appear to be any appetite for it.

Stamp duty is now a self-assessment tax, like all other Irish taxes. It is subject to the normal range of penalties for failure to make returns, failure to make payment, or delays in making payment. However, stamp duty additionally carries enforcement provisions not found in other taxes.

The most serious of these is that an unstamped, or inadequately stamped document may not be used in legal proceedings. The practical effect of this is to call in doubt the title to property, where transfers to property was not properly stamped. This is a draconian penalty, without precedent in any other tax. The title to a property is not called in doubt by a failure to fully pay income tax on income which it generates, or capital gains tax on a prior disposal of the property. The provision seems disproportionate in its consequences. Why is it necessary in the context of stamp duty, when other taxes have been satisfactorily administered for centuries without a similar provision?

There are also severe penalties imposed where the values used in stamping an instrument are subsequently determined to be an understatement of the market value of the property. If the value which the taxpayer uses in his self-assessment is wrong by an amount greater than 15p.c. of the value, duty chargeable is increased by 25p.c.. If the error is greater than 30p.c., the duty is increased by 50p.c., and if the error is greater than 50p.c., the amount of stamp duty chargeable is doubled.

Penalties such as this would seem harsh even if they were for fraudulently understating the actual amount of consideration paid for property. But that is not what is involved here. What is involved here is incorrectly estimating the open market value of the property. The open market value of property is not an objective fact – it is at best a guess. Valuers can differ quite an amount in their estimate of the value of a particular item of property. This is true not only of land and buildings, but even more so of intangible property such as goodwill, patents, trademarks, and copyrights. Valuers could easily differ by an amount of 50p.c. in their estimate of the true market value of such intangibles. But the unfortunate taxpayer can be faced with penalties of up to 100p.c. of the stamp duty when his valuer gets it ‘wrong’. There is no similar penalty in other taxes such as income tax or capital gains tax where equivalent innocent error or difference of opinion arises. Why is it necessary in stamp duty?

Late payment of stamp duty attracts the usual penal interest rates. But additionally penalties are payable on late payment of stamp duty over and above the interest. A six month delay in paying stamp duty attracts a 10p.c. penalty – equivalent to a 20p.c. interest rate, on top of the interest already charged at penal rates. A twelve month delay can attract a 30p.c. penalty in addition to penal interest rates. These penalties are not confined to a situation where fraud is involved. They can apply when non-payment is due to innocent error, legitimate disputes with the Revenue as to the amount of tax payable, or simple lack of funds. Other taxes do not seem to require such draconian penalties, so why are they necessary on stamp duty?

The real problem
The day may come when it is appropriate to look again at stamp duty on residential property and that day is most likely to be when the residential property market encounters difficulties. But right now is the time to take a look at the damage which stamp duty inflicts on business and on economic development.

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