Closing the Stamp Duty Loophole
Updated: Sep 4
The Case for Reforming UK Stamp Duty
Writing in April 2015, Professor Avinash Persaud of Intelligence Capital published a detailed analysis revealing how the United Kingdom could generate billions in additional tax revenues. During the 2013 to 2014 financial year, Her Majesty's Revenue and Customs successfully raised 3.1 billion pounds through stamp duties on stocks, shares, and other liable securities. However, this impressive figure masked a severe structural flaw, as a staggering 63 per cent of turnover in United Kingdom equities remained completely tax-exempt. This report exposed how the financial sector was exploiting these exemptions and outlined a clear strategy to reclaim the missing funds.
The Abuse of Intermediary Relief
The primary mechanism for this massive tax avoidance was the abuse of intermediary relief, traditionally known as the market-makers' exemption. Originally, this relief was designed solely to protect genuine market makers who provide essential liquidity by standing ready to buy and sell securities throughout the trading day. Instead, the exemption had been stretched to shelter High Frequency Trading and the non-market making activities of intermediaries. A massive portion of this untaxed turnover was generated by intermediaries actively hedging their end-customers' speculative activities in Contracts for Differences and Financial Spread Bets. By allowing hedge funds to gain exposure to share prices without officially purchasing the underlying shares, the financial sector successfully bypassed the stamp duty entirely.
Calculating the Revenue Potential
Persaud calculated that strictly redefining market makers and closing this intermediary loophole would generate between 1.2 billion and 1.9 billion pounds in additional tax revenues. This reform would instantly elevate the total stamp duty revenues from 3.1 billion pounds to a remarkable 4.3 billion or 5.0 billion pounds annually. To ensure accuracy, these calculations conservatively factored in the elasticity of trading volumes and the true, volume-weighted transaction costs faced by traders.
Additional Exemptions to Target
Beyond the intermediary loophole, the report targeted other unwarranted exemptions introduced by the government in 2014. The decision to exempt shares on growth markets, such as the Alternative Investment Market, cost the exchequer 170 million pounds in lost revenues without providing any meaningful boost to market activity. Similarly, extending stamp duty exemptions to collective investment schemes drained a further 145 million pounds. The report concluded that reversing these two specific loopholes would effortlessly raise an additional 315 million pounds with virtually no market disruption.
Why the Stamp Duty Works
Anticipating the banking lobby's standard threats of capital flight, the report highlighted why the United Kingdom's stamp duty is fundamentally robust and practically impossible to evade. Because the tax is legally tied to the transfer of ownership, a share purchase cannot be legally enforced unless the stamp duty has been paid. This ironclad mechanism forces foreign investors to comply, resulting in an estimated 40 per cent of the tax being paid by non-residents. Furthermore, the collection process is exceptionally efficient, costing just 0.09 pence for every pound collected, largely because 90 per cent of the revenue is automatically captured via the electronic CREST clearing system.
We invite you to download and read the full report to explore the detailed economic analysis supporting the closure of these lucrative financial loopholes.
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