In most corporate transactions an agreement to transfer chargeable securities is followed promptly with the actual completion of a deal and the transfer of actual shares by stock transfer form. That stock transfer form being the stampable instrument upon which Stamp Duty at 0.5% is paid.
The payment of that Stamp Duty franks a charge to SDRT that has technically already arisen. Provided the Stamp Duty is paid within certain time limits, the SDRT charge itself does not need to be paid.
However, where things get tricky is in situations where that transfer doesn’t occur either within the required period or at all. An example is where parties wish to restructure or change a deal post agreement but pre completion. In this situation, a lurking SDRT charge can cause a nasty surprise. Corporate lawyers should familiarise themselves with the core SDRT charging principles and keep this in mind when completing agreements.
Overview of the primary charge to SDRT
The primary charge to SDRT arises under section 87(1) Finance Act 1986, which states:
“This section applies where one person (A) agrees with another person (B) to transfer chargeable securities (whether or not to B) for consideration in money or money’s worth.”
Unlike stamp duty which only applies to an instrument of transfer, such as a stock transfer form which completes the transfer, an SDRT charge arises on the agreement itself (whether that agreement is oral or written).
Also unlike Stamp Duty, the territorial scope of SDRT means that it matters not whether the agreement is formed or signed within the UK and whilst there is no legal obligation to present an instrument of transfer for stamping for the purposes of Stamp Duty (although restrictions exist in UK Company law which would mean the transfer could not be registered or enforced) HMRC have wide powers relating to the enforcement and collection of SDRT within the Stamp Duty Reserve Tax Regulations 1986 (the “SDRT Regs”).
Sections 87(2) and 87(3) Finance Act 1986, confirm that the agreement becomes chargeable to SDRT on the “Relevant Day” which is either:
- in the case of an unconditional agreement the day the agreement is entered into (i.e., in the case of written agreements, usually when the agreement is signed), or
- in the case of a conditional agreement when the agreement becomes unconditional or when it is clear that the relevant condition will be satisfied.
Once there is an unconditional agreement to transfer chargeable securities therefore, the SDRT charge arises.
Once an SDRT charge has arisen in respect of an agreement, it can only be cancelled under the terms of the legislation if that agreement is completed and an instrument transferring title to those chargeable securities is actually stamped (see section 92 Finance Act 1986) within six years of the relevant agreement.
The charge to SDRT is not cancelled just because the agreement is in fact never completed.
With the exception of certain types of transactions within CREST (the system under which securities are held and transferred electronically) SDRT is chargeable at the rate of 0.5% by reference to amount of the consideration in money or money’s worth to be given for the transfer (See Section 87(6) Finance Act 1986).
Outside of CREST SDRT must be paid by the transferee and unlike stamp duty, there is no requirement to round SDRT up to the nearest £5 and, therefore, it should be paid to the nearest penny.
SDRT must be paid by the “Accountable Date” which for non-CREST transactions is the seventh day of the month following that in which the charge arises. (see Regulations 2 and 3 of the SDRT Regs.) This Accountable Date arises, even if the charge can be cancelled by the payment of stamp duty on the instrument of transfer, at which time any payment of SDRT which has been made can be refunded by making a claim to HMRC.
In practice, however HMRC’s published practice is that to avoid situations where SDRT is payable but is likely to have to be reclaimed within a short period of time, then if stamp duty (on the relevant instrument, usually a stock transfer form) is paid within 60 days of the Relevant Day, HMRC will not seek to charge interest on SDRT having not been paid. (see STSM142020).
It is for this reason that SDRT is often not encountered outside of the CREST System in most sales of shares in UK companies, unless there is a significant amount of time between exchange and completion.
What is an “agreement” and when is it unconditional for the purposes of Section 87 Finance Act 2003?
Section 87(1) requires that there is an agreement for the transfer of chargeable securities. Broadly speaking, chargeable securities includes shares which have been issued or registered in the UK together with any rights and interests in or in relation to them.
The use of the terms “agrees” and “agreement” within section 87, are deliberate wider terms than the term contract, but in essence they mean the same thing and neither requires a document to be reduced to writing to evidence an agreement or contract has been reached between the parties. However it is clear both from the wording at Section 87(3) the decision in the case of Save & Prosper Securities v The Commissioners of Inland Revenue (2000) that there is unlikely to be an agreement for the purposes of Section 87, unless taking into account the intentions of the parties and the form that agreement takes that there must be some form of legally binding agreement or contract between the relevant parties.
Accordingly, in our opinion, there needs to be an unconditional and legally binding agreement between the parties for an SDLT charge to arise.
There is no definition within the SDRT legislation as to when an agreement is conditional or not. Therefore, the usual case law concepts are applied by HMRC to determine the situation. There is a very useful summary by HMRC about case law and determining whether a contract is conditional at CG14270, (where conditionally is considered for the purposes of determining the disposal date for Capital Gains Tax purposes). In this published guidance, cross referenced to case law it is stated:
“It can be difficult to recognise whether a contract is conditional. Many contracts contain conditions which are to be fulfilled. A contract is only conditional …. if particular conditions have to be satisfied before the contract becomes a binding document. These are called ‘conditions precedent’. When these conditions are met the contract becomes legally binding. At that point the contract has become unconditional.
Other conditions in contracts are called ‘conditions subsequent’. These may require the parties to do various things before completion or may establish how the contract is to be performed. But they do not prevent the contract from being binding with immediate effect.”
Therefore, for an agreement to be conditional, any conditions must be conditions precedent and not conditions subsequent. In practice, this means that the agreement to sell the shares must be subject to the satisfaction of genuine third party conditions that are not capable of being waived by the buyer or the seller and which must be satisfied before the agreement itself is legally binding.
An agreement is therefore not conditional if it only contains conditions subsequent.
Condition subsequent are often referred to as closing or completion conditions. In these cases the agreement is binding on the parties but completion will not take place until certain conditions have been met.
Penalties and Interest for SDRT
The Penalty Charging regime for SDRT is found in Schedule 55 Finance Act 2009 and HMRC charge interest on late payments of SDRT on a daily rate which is currently 7.75%.
The Penalty Regime for late notification is a growing regime, which includes:
- £100 fixed penalty for late submission
- daily penalties at £10 a day (up to a total of £900) if the notice still hasn’t been filed after a period of three months beginning with the penalty date (i.e. the date after the filing date of the document)
- if the notice still hasn’t been filed after a period of six months from the penalty date, the penalty is the greater of £300 and 5% of the undeclared tax, and
- if the notice still hasn’t been filed after a period of 12 months from the penalty date, the penalty is normally the greater of £300 and 5% of the undeclared tax (except that much higher percentages apply in cases of deliberately withholding information).
The Penalty for late payment of the SDRT itself which starts to apply from 30 days (see Schedule 56, Finance Act 2009). The penalty is initially 5 per cent of the unpaid tax. If any amount of the tax is unpaid six and 12 months after the due date, additional penalties of 5 per cent of that amount apply.
Possible Changes to Stamp Taxes
A consultation to introduce a single securities tax, combining SDRT and Stamp Duty closes in June 2023 and was largely welcomed, so its possible that some radical changes to the system may be coming. Watch this space!
Tax Support
Tax advice should always be taken on Corporate transactions to ensure Stamp Taxes are carefully considered.
Contact info@winslows.co.uk for further information.
