Monday January 26, 2015
Abolition of Stamp Duty on Growth Markets - Policy objective
The measure will help boost investor participation in equity growth markets and improve the conditions for growing companies raising equity financing.
Abolition of Stamp Duty on Growth Markets - has the Chancellor done enough?
The failure of the Chancellor to include ALL private companies in the provisions for the abolition of Stamp Duty on the purchase of second hand shares, rather than just those on AIM and ISDX, will hold back the development of the early stage equity capital markets in the UK
This government's abolition of Stamp Duty for the 'growth' sector is highly commendable, but as sometimes happens the move includes some for whom it wasn't intended and excludes many of those for whom it was clearly meant to help. In that respect to include the many foreign companies on AIM and ISDX, and not the growing UK companies that are not part of these 'exchanges', is an oversight and, one assumes, unintended in the light of the Policy Objective behind the move.
Stamp duty in its 'modern' form stems from the Dutch in 1624. Since its introduction to the UK in 1694 to pay for the war with France, Stamp Duty in this country has had a mixed history and some unintended consequences along the way. A hundred years on to 1795 and the attempted enforcement of stamp duties in English colonies in America led ultimately to the Boston Tea Party and the outbreak of the American War of Independence.
How various governments have opportunistically used Stamp Duty is exemplified by William Pitt the Younger in 1797, describing stamp duty thus; '...easily raised, pressing little in any particular class, especially the lower orders of society, and producing revenue safely and expeditiously collected at small expense'. He virtually doubled the tax that year!
Whilst we are perhaps more familiar with the tax as it pertains to property transactions, it is also an HMRC earner in the world of share transactions. In April 2014, this Government implemented the abolition of Stamp Duty on what it termed 'Growth' markets. In reality these were securities quoted on the AIM and ISDX markets regardless of whether they were UK growth companies or overseas entities listing in the UK.
Under the current rules, therefore, HMRC still lays claim to the duty on share purchase transactions involving UK private companies that not quoted on these markets thus creating the odd situation where a private company and publicly quoted company selling shares will each attract Stamp Duty, but one listed on AIM or ISDX will not. It would make more sense if all shares NOT on the Main Market were treated equally and trades in them were exempt from Stamp Duty.
Whilst the cash impact of Stamp Duty clearly matters on the pricing of a share sale, it's also worth noting that the time it takes to settle via an HMRC Stamp Office can be several weeks, which acts as a brake on the efficient transfer of value from one shareholder to another. This further restricts the market and is in direct contradiction to the Policy Objective of improving the overall conditions for growing companies raising equity financing.
Last year the investors using Asset Match were charged a collective £40k of stamp duty because the shares we auction attract stamp duty, although essentially they are no different to the shares traded on AIM or ISDX, but, just as importantly, they also faced delays in settlement because of the requirement to liaise with HMRC.
We established Asset Match, as the platform for shares in UK private and unquoted companies in order to enable shareholders of "locked in" equity in privately owned companies to exit from their investments. One of the reasons we did this was because we recognised the illiquidity of such investments was reducing the funds investors had available to invest in new early stage businesses. Whilst the Stamp Duty issue is very alive for us and our investors, it is worth pointing out that as the companies that have raised money on the Crowdfunding platforms start to mature the issue will begin to affect thousands more people. Unless Stamp Duty on private company shares is abolished it will start to hamper this easy way of recycling capital into growth companies and will hold back the development of the market for early stage equity.
I assume that it was oversight on the part of the Chancellor in the last budget not to include the sale of "unquoted" shares not listed on AIM and ISDX and hope that he will rectify it in the next one. In doing so he would create a level playing field for growth companies that wish to enable their investors to get an exit without the need to seek a (relatively time consuming and expensive) quote on AIM or ISDX.
The financial impact is likely to be negligible as evidenced by the paper introducing the abolition contained a 'Summary of Impacts' which suggested the cost of abolition to HMRC was circa £170m per annum in pure cash terms, with negligible impacts elsewhere. Indeed this paper referred to positive developments through the abolition in terms of settling the share transactions. It should only take one line in the next Finance Act to make the change - all that needs to be said is that,"all private company share transactions will be included under the same provisions as those traded on AIM and ISDX"
Along with the many thousands of investors now enjoying the opportunity to recycle their investment monies from long established BES and EIS companies into new growth companies, I hope that the Chancellor will take the opportunity in the Budget to rectify this situation thereby proving that he really understands that the UK's Growth Markets are all over the UK and not just in the most obvious places.
Stuart Lucas, Co-Founder Asset Match