Stamp duty on shares reform: deferred, contingent and uncertain consideration

HMRC plans to replace the outdated stamp taxes system with a new Single Tax on Securities (STS) by 2027. STS may follow principles from the SDLT regime, potentially affecting how contingent and uncertain consideration is taxed.

As part of the Government’s Spring Update, HMRC published a summary of responses to its 2023 consultation on the modernisation of the stamp taxes regime. The anticipated – and welcome news is that a new UK single tax on securities (STS) is to be introduced and will replace the existing twofold system (comprising ad valorem stamp duty and stamp duty reserve tax), which dates back to 1891. The existing regime is often (unsurprisingly) regarded as outdated and reform is necessary and long overdue.

It is intended that the new STS regime will be introduced in 2027 and elements of the new regime are expected to follow principles set out in the stamp duty land tax (SDLT) regime which applies to acquisitions of real estate.

This article explores the potential impact on taxpayer’s stamp duty (soon to be STS) liability if the regime does indeed follow principles set out in the SDLT regime – particularly in regard to contingent and uncertain consideration.

How do the regimes treat contingent and uncertain consideration

Stamp duty

The current stamp duty rules provide that any future deferred contingent or uncertain consideration for a share acquisition will be taxed by applying the “contingency principle”.   
The contingency principle mandates that stamp duty is calculated based on the maximum potential consideration. For example, where future consideration is contractually fixed in amount but contingent on the occurrence of a future event, it is assumed, for the purpose of calculating stamp duty, that the contingency will occur and tax is paid as if the future consideration will be payable (regardless of whether it is ultimately paid).

Similarly, where an earn out is subject to a stated cap, stamp duty is payable by reference to the stated cap, with no refund if the actual earn out payment is ultimately less.

In the event that the transaction documentation does not provide for a maximum amount, the stamp duty is instead computed by reference to any minimum stated amount. In the absence of a maximum or minimum amount, the stamp duty is computed by reference to any stated guide amount.

In the absence of any maximum amount, minimum amount or guide amount, the future consideration will be treated as unquantifiable and is outside the scope of the tax. Therefore, an unquantifiable earn out, rather generously, will not attract a stamp duty liability.

Stamp duty is a one-time tax that must be paid upfront on all known consideration, including contingent and deferred amounts such as earn-outs. No deferral of payment is allowed, although a “wait and see” application can be made for consideration which is ascertainable but not yet determined at completion (i.e. where completion accounts have to be finalised, but the amount of the consideration does not depend on any future events).

SDLT

Similar to the stamp duty regime, where future consideration is fixed but contingent, it is assumed that the contingency will occur. However, unlike stamp duty, the taxpayer is entitled to claim a refund of overpaid SDLT in the event that the contingency does not in fact occur.

Uncertain consideration under the SDLT regime is calculated by reference to the taxpayer’s reasonable estimate of the consideration expected to be given for a transaction, so there is no ‘get out’ for uncertain consideration which is wholly unquantifiable; the taxpayer must give a reasonable estimate of this consideration and pay SDLT by reference to this. Where the taxpayer’s estimate ultimately proves too high, the taxpayer can reclaim any overpaid SDLT. Conversely, if the taxpayer underestimates any uncertain consideration and therefore its SDLT liability, it must pay any additional SDLT due to HMRC within a prescribed time frame (either 14 or 30 days of the actual amount of the consideration becoming known).

Where contingent and/or uncertain consideration may not be known until more than 6 months after the effective date of the transaction (i.e., the earlier of substantial performance or completion), a taxpayer can make an application to defer payment of the SDLT until such time as the consideration becomes ascertained and/or the contingency occurs (meaning that tax does not have to be paid immediately in respect of the contingent amount or the reasonable estimate of the uncertain amount, but instead is only paid when those amounts actually become payable).

What the new regime could look like

Uncertain consideration

Some commentators view the SDLT regime as being skewed in favour of HMRC and less generous to taxpayers in comparison to the stamp duty regime. This perception is partly accurate, especially regarding the handling of unquantifiable consideration. However, the SDLT regime ensures the correct tax amount is paid for any transaction. It adjusts the taxpayer’s SDLT liability based on the actual consideration given, with upward and downward adjustments in the taxpayer’s SDLT liability when contingent and/or uncertain consideration becomes unconditional and/or certain.

It seems likely that the STS regime will adopt a similar approach to the SDLT principles for uncertain and contingent consideration. This approach will create winners and losers depending on the particular facts of each case. Crucially, however, aligning taxpayers' STS liability with the actual consideration given for securities should result in a fairer overall outcome.

Deferring tax liability

The ability to defer payment of STS on contingent and/or uncertain consideration until such consideration becomes unconditional and/or certain will be a welcome development for taxpayers particularly in regard to the payment of earn out consideration.

HMRC have suggested that taxpayers will be able to defer payment of STS for up to 12 years (an initial 4 year period with a possible extension of up to 12 years). In contrast, payment of tax under the SDLT regime can be deferred indefinitely (unless, of course, consideration becomes unconditional or certain). It is unclear to us why STS should not follow a similar approach – the suggestion from HMRC is that under the STS regime, if the 12 year limit is reached and the consideration is still contingent and/or uncertain, STS would need to be paid on the assumption the contingency will occur and/or on the basis of a reasonable estimate of the uncertain consideration. This would therefore seemingly impose an obligation on a taxpayer to notify HMRC during the deferment window if contingent consideration is not expected to become payable – there is no equivalent obligation under the SDLT regime.  That said, there are not many transactions where the contingent or uncertain consideration for share acquisitions remains unresolved 12 years after the transaction has taken place.

Under the SDLT regime, no interest is payable by the taxpayer on amounts of deferred SDLT which naturally further incentivises taxpayers to make deferment applications. It will be interesting to see if the STS regime similarly adopts this generous approach.  Currently HMRC levy interest on late paid stamp duty subsequent to a “wait and see” application (subject to a de minimis limit).

Final thoughts 

If the STS regime’s approach to chargeable consideration closely tracks the SDLT regime we consider that this would be a desirable development in the law which will likely produce fairer results in determining taxpayers’ liability under the STS regime. There is a danger, however, that HMRC could seek to have their cake and eat it – adopting elements of the SDLT regime which would result in increased tax liability for taxpayers whilst simultaneously omitting elements of the SDLT regime which would benefit taxpayers. If the STS legislation, as HMRC has promised, largely follows  the SDLT regime then these concerns should not materialise, but the devil will be in the detail and we eagerly await the draft STS legislation which will be published in due course.