As we end the year 2023 we wanted to highlight a developing technical matter under UK tax law that we believe will have the effect of preserving for UK plcs offering and selling securities in US initial public offerings and listings on the New York Stock Exchange or Nasdaq the choice of listing their IPO securities directly in the form of shares or alternatively in the form of American Depositary Shares (ADSs/ADRs).
This is because towards the end of 2023 the UK Government has evidenced its firm intention to legislate in 2024 such that there should be no point in time when UK stamp duty or SDRT should be payable in connection with a typical US IPO process involving a UK incorporated company, thus extending (and expanding upon) provisions of EU law that have until now provided some clarity but which post-Brexit and post 31 December, 2023 will no longer be the controlling domestic law of the United Kingdom.
It is true that while the UK tax legislative developments seek only to extend and expand upon existing EU law that expires at the end of December 2023, SDRT/stamp duty concerns, and the legal certainty with respect thereto that has been required by financial intermediaries in US IPO structures, have been among the reasons that some UK plcs, particularly in smaller sized offerings, have chosen to list their securities on US exchanges in ADS/ADR form. By amending UK domestic law to codify the current position (which depends on the application of EU law) post-2023, UK plc issuers should be able to continue to pursue listings in the US, and to consider whether a direct share or ADS/ADR listing structure is the correct one for them, with such considerations as time, cost, fungibility and index inclusion in the United States continuing to additionally feature in their decision-making.
Stamp duty / SDRT is chargeable on transfers of UK shares, generally at 0.5% of the sale price. For UK listed plcs, whose shares are traded in CREST, the CREST system collects this SDRT on behalf of HMRC. This collection mechanism does not apply, however, where UK plcs are listed outside the UK, and have their shares traded in overseas clearance services (such as DTC in the US) or in the form of depositary receipts. To get around this, UK legislation imposes a 1.5% "season ticket" stamp duty / SDRT charge at the point when UK shares are issued or transferred to an overseas clearance service or depositary receipts system, with subsequent trades within the clearance system or depositary receipts system then taking place free of stamp duty / SDRT. (Note that it is possible for clearance services to elect out of the season ticket regime and choose to collect SDRT on those future trades, but this does not apply in the case of DTC.) Due to EU case law, in recent years the 1.5% charge was found to breach could no longer be imposed, or on the transfer of shares where that transfer was integral to the raising of new capital or was necessary in order to bring shares to listing. Accordingly, although the 1.5% charge has remained part of UK domestic law, for the most part it has not been imposed as a result of being contrary to EU law. To date, and notwithstanding Brexit, that position has been preserved under the European Union (Withdrawal) Act 2018.
Because however those provisions of the Capital Duties Directive will no longer form part of retained EU law, and consequently no longer have supremacy over the UK domestic law providing for the 1.5% charge, with effect from 1 January 2024, the UK Government needed to act in order for stamp duty / SDRT not to be imposed post 1 January 2024 under these circumstances.
Fortunately the Government has taken action to address this situation and to ensure (as long as relevant legislation is enacted in its current form and within its proposed timing) that there are no gaps in time when UK plcs would come to market and stamp duty / SDRT would be imposed.
As announced on 14 September, 2023, the Government will legislate to ensure that the existing position where no stamp duty or SDRT is chargeable on the issue of UK shares (or other chargeable securities) onto foreign markets, and on certain related transfers of shares, will remain in place and be brought permanently into UK law following the changes in the Retained EU Law (Revocation and Reform) Act 2023 (REUL) taking effect. The new legislation is expected to come into effect with the passage of the Finance Bill, which is expected in Q2 2024. Equally helpfully, the Government has taken measures seeking to ensure that the new legislation will have effect from 1 January 2024, thus eliminating the gap noted above. The Government has done so by presenting relevant resolutions, as part of the Autumn Statement in late November 2023, under the Provisional Collection of Taxes Act 1968 (for SDRT aspects of the draft legislation) and section 50 Finance Act 1973 (for stamp duty aspects of the draft legislation) so that the substantive amendments to the legislation will have effect from 1 January 2024.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
