ISLA responds to HMRC on Stamp Duty and SDRT
28 June 2023 UK
Image: AdobeStock/utah51
The International Securities Lending Association (ISLA) has released a response to the UK HMRC consultation on modernisation of stamp tax on equities trading and stock lending transactions.
His Majesty’s Revenue and Customs (HMRC), in its consultation document, examines whether it is beneficial to adopt a single tax framework for securities transactions, rather than the current arrangement where securities trades fall into scope of both the Stamp Duty and Stamp Duty Reserve Tax (SDRT) frameworks.
ISLA indicates that it supports the adoption of a single tax on UK securities and steps to modernise and simplify legislation, enabling firms to comply with a single, modern and simplified digital tax.
Specifically in its response, the trade association engages with content of the consultation document relating to stock lending and repurchase relief.
It shares its concerns, along with the Association of Financial Markets in Europe (AFME) and some other trade associations, that the UK government is missing an opportunity by not intending to widen the geographical application of tax relief for stock lending and repo transactions to regulated brokers and lending agents in countries that have a double taxation treaty (DTT) with the UK.
ISLA understands that the UK government’s position is driven by the fact that no strong case has been made for this geographical extension of tax relief for SFTs.
The Association aims to make a case for doing so, outlining the expected benefits for the securities lending industry and the improved liquidity this will potentially deliver for UK-listed equities.
It proposes that the UK has taken a position which no other country has adopted relating to applying a geographical limit for securities lending trades.
It therefore encourages the UK government to fix the shortcomings in the alternative (pre-MiFID) relief detailed in s.88AA(3) Finance Act of 1986, which makes this tax relief difficult to obtain since it applies HMRC published practice dating from 10 years ago.
Two flavours of relief are currently available under Stamp Duty and SDRT that are applicable to securities lending trades. Those under s.88AA(2A) were introduced in 2007 to comply with the Markets in Financial Instruments Directive (MiFID), which remains applicable after Brexit to firms authorised by their national regulator to provide MiFID investment services business and which are acting as principal (either as lender or borrower) to a securities lending transaction.
The other is available under s.88AA(3), which was applicable before 2007 and continues to apply today where trades are conducted on a regulated market, multilateral trading facility or recognised foreign exchange.
ISLA indicates that this tax treatment under s.88AA(2A) restricts liquidity of UK equities in the hands of brokers outside of the UK and European Economic Area.
It also limits the ability of UK-based beneficial owners to lend UK securities since this tax provision results in securities issued in other countries being more readily available for lending or for use as collateral.
In case of settlement fails, or other operational failure, this also makes it more difficult for firms without a direct relationship with a UK or EU-based broker to borrow UK shares to use as fails coverage.
ISLA describes the relief available under s.88AA(2A) as a “historical anomaly” that resulted from the UK’s previous membership of EU and the requirement for UK firms to comply with MiFID.
“In our view, it makes no sense and is inconsistent with a so-called “modernisation” of the stamp taxes code to restrict a commercial relief to certain parties due to the legal situation in 2007, which no longer applies, rather than sensibly assessing the commercial landscape regarding UK shares and which should be able to benefit from this relief in 2023,” ISLA says in its consultation response.
Developing this point, ISLA indicates that most countries that apply stamp tax or financial transaction taxes to securities lending and financing transactions typically apply an exemption to temporary title transfers, as may be applicable to securities lending and repo trades or to the associated collateralisation of those transactions.
Only the UK imposes conditions relating to the geographical location of the parties to the trade, ISLA notes.
The Association also urges modernisation of tax treatment of SFTs under s.88AA(3). “Where a lending agent, such as a global custodian bank, acts on behalf of a lender in an agency capacity in lending its securities to a borrower, the agent is not able to benefit from relief available under s.88AA(2A), discussed above, which is only available to firms acting as principal,” says ISLA.
It proposes that a better relief framework could be entirely self-assessed or based upon more specific conditions, such as where trades are reported through the UK CSD, Euroclear UK and International, as being loan trades or loan returns. “This creates a clear and automated audit trail … where stock lending relief is asserted [that] the shares are in fact returned,” ISLA concludes.
The HMRC consultation on Stamp Taxes on Shares Modernisation was open for eight weeks following the publication of the consultation paper, running from 27 April until 22 June 2023.
His Majesty’s Revenue and Customs (HMRC), in its consultation document, examines whether it is beneficial to adopt a single tax framework for securities transactions, rather than the current arrangement where securities trades fall into scope of both the Stamp Duty and Stamp Duty Reserve Tax (SDRT) frameworks.
ISLA indicates that it supports the adoption of a single tax on UK securities and steps to modernise and simplify legislation, enabling firms to comply with a single, modern and simplified digital tax.
Specifically in its response, the trade association engages with content of the consultation document relating to stock lending and repurchase relief.
It shares its concerns, along with the Association of Financial Markets in Europe (AFME) and some other trade associations, that the UK government is missing an opportunity by not intending to widen the geographical application of tax relief for stock lending and repo transactions to regulated brokers and lending agents in countries that have a double taxation treaty (DTT) with the UK.
ISLA understands that the UK government’s position is driven by the fact that no strong case has been made for this geographical extension of tax relief for SFTs.
The Association aims to make a case for doing so, outlining the expected benefits for the securities lending industry and the improved liquidity this will potentially deliver for UK-listed equities.
It proposes that the UK has taken a position which no other country has adopted relating to applying a geographical limit for securities lending trades.
It therefore encourages the UK government to fix the shortcomings in the alternative (pre-MiFID) relief detailed in s.88AA(3) Finance Act of 1986, which makes this tax relief difficult to obtain since it applies HMRC published practice dating from 10 years ago.
Two flavours of relief are currently available under Stamp Duty and SDRT that are applicable to securities lending trades. Those under s.88AA(2A) were introduced in 2007 to comply with the Markets in Financial Instruments Directive (MiFID), which remains applicable after Brexit to firms authorised by their national regulator to provide MiFID investment services business and which are acting as principal (either as lender or borrower) to a securities lending transaction.
The other is available under s.88AA(3), which was applicable before 2007 and continues to apply today where trades are conducted on a regulated market, multilateral trading facility or recognised foreign exchange.
ISLA indicates that this tax treatment under s.88AA(2A) restricts liquidity of UK equities in the hands of brokers outside of the UK and European Economic Area.
It also limits the ability of UK-based beneficial owners to lend UK securities since this tax provision results in securities issued in other countries being more readily available for lending or for use as collateral.
In case of settlement fails, or other operational failure, this also makes it more difficult for firms without a direct relationship with a UK or EU-based broker to borrow UK shares to use as fails coverage.
ISLA describes the relief available under s.88AA(2A) as a “historical anomaly” that resulted from the UK’s previous membership of EU and the requirement for UK firms to comply with MiFID.
“In our view, it makes no sense and is inconsistent with a so-called “modernisation” of the stamp taxes code to restrict a commercial relief to certain parties due to the legal situation in 2007, which no longer applies, rather than sensibly assessing the commercial landscape regarding UK shares and which should be able to benefit from this relief in 2023,” ISLA says in its consultation response.
Developing this point, ISLA indicates that most countries that apply stamp tax or financial transaction taxes to securities lending and financing transactions typically apply an exemption to temporary title transfers, as may be applicable to securities lending and repo trades or to the associated collateralisation of those transactions.
Only the UK imposes conditions relating to the geographical location of the parties to the trade, ISLA notes.
The Association also urges modernisation of tax treatment of SFTs under s.88AA(3). “Where a lending agent, such as a global custodian bank, acts on behalf of a lender in an agency capacity in lending its securities to a borrower, the agent is not able to benefit from relief available under s.88AA(2A), discussed above, which is only available to firms acting as principal,” says ISLA.
It proposes that a better relief framework could be entirely self-assessed or based upon more specific conditions, such as where trades are reported through the UK CSD, Euroclear UK and International, as being loan trades or loan returns. “This creates a clear and automated audit trail … where stock lending relief is asserted [that] the shares are in fact returned,” ISLA concludes.
The HMRC consultation on Stamp Taxes on Shares Modernisation was open for eight weeks following the publication of the consultation paper, running from 27 April until 22 June 2023.
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