UK Stamp Duty Revenues Flat Despite Rising Trading Volumes

by Robert Lee, Tax-News.com, London

19 January 2005

Figures show that revenues from the United Kingdom’s stamp duty tax on share trades is likely to remain flat this year at £2.6 billion, despite a sharp increase in the volume of shares traded on the London Stock Exchange.

It seems the major reason for this is that investors are increasingly shunning traditional share purchases, which attract a transaction tax of 0.5% - a levy now almost unique in the industrialised world - in favour of derivatives known as contracts for difference (CFDs), which do not attract the tax.

CFDs allow investors to profit on the movement of a share price without actually owning the physical stock. Similar to other derivative instruments such as futures contracts, two parties enter into an agreement to settle at the close of their contract the difference between the opening and closing price of a company’s share price.

Firms that offer CFDs are able to hedge their exposure to the contracts by physically buying the underlying stock, and by doing so enjoy a tax concession that means they do not have to pay stamp duty.

CFDs have rapidly grown in popularity in recent years, and this has been reflected in government revenues from stamp duty, which have traditionally been one of the largest contributors to the Treasury’s coffers.

According to figures quoted by the Daily Telegraph, stamp duty revenues had been broadly increasing in line with share volumes on the London Stock Exchange, reaching a peak of £4.5 billion in 2000/2001 when the LSE turned over £1.86 trillion in share trades. Had this trend continued, the Treasury could have collected more than £6 billion from stamp duty in the current tax year. Instead, the government is on course to collect less than half of this figure.

According to Howard Flight, the Conservative Party's special envoy to the City of London, the figures strengthen the case for a review of the tax, and even its complete elimination.

"Many people think this is a tax on the rich. It is not. Wealthy individuals and institutions have access to sophisticated derivatives that enable them to avoid the tax. The ordinary person and his pension fund do not,” he observed, according to the Telegraph.

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