Motion to Consider
My Lords, the purpose of these regulations is to ensure the payment of stamp taxes on shares in relation to company takeovers by amending the Companies Act to prevent companies from using reduction of share capital provisions as part of a scheme of arrangement to facilitate a takeover. These reforms were announced in the Autumn Statement and are part of measures to protect the UK stamp duty base and ensure that businesses make a fair tax contribution.
The use of schemes of arrangement to facilitate company takeovers is not new but is becoming increasingly common. The increasing use of one form of scheme of arrangement for takeovers, often referred to as cancellation schemes of arrangement, has prompted the Government to take action now. In contrast to other forms of company takeover, cancellation schemes of arrangement do not incur a stamp tax liability. That is because stamp tax is chargeable on the transfer of shares from one party to another but not on fresh issues of shares. Cancellation schemes of arrangement involve the company that is the target of the takeover cancelling its shares, using the provisions in Part 17 of the Companies Act to reduce its share capital, and then issuing fresh shares to the acquiring company.
The Government believe that all takeovers should be treated equally in stamp tax terms. However, EU law—specifically the capital duties directive—prohibits the charging of tax on the issuing of new shares. Therefore these reforms amend Section 641 of the Companies Act to prevent a company from reducing its share capital through the use of a cancellation scheme of arrangement to facilitate its takeover. Of course, it will still be possible to effect a takeover using a transfer scheme of arrangement or contractual offer. Both these methods achieve the same overall outcome—the takeover of a company or merger of two companies— but stamp taxes are payable. It will also be possible to continue to use cancellation schemes of arrangement outside the takeover context, such as intragroup restructuring, de-mergers, rescheduling debt or returns of share capital.
We have acted quickly to bring forward these regulations after the announcement in the Autumn Statement, consulting informally with relevant experts and stakeholders in the legal and tax professions, as well as shareholder groups. We did so to reduce the risk of companies accelerating their takeover plans so as not to be impacted by the legislation. None the less, we appreciate that it would be unfair to apply the change to takeovers and mergers already in progress. As such, these reforms do not apply where the bidder has made a firm intention to make an offer—in accordance with the takeover code, or if the terms of the offer have been agreed, where not subject to the takeover code—before this instrument comes into force.
In terms of costs to business, apart from the requirement to pay stamp tax at 0.5% of the value of the consideration paid for the shares, there will be only relatively small one-off familiarisation costs for companies that are parties to a takeover or merger, and potentially their shareholders and creditors. These small costs will also apply to the intermediary community, such as legal firms and advisers specialising in takeovers and schemes of arrangement. Compared with the wider costs involved in a takeover, such as the costs associated with the actual integration of the businesses concerned, these costs are likely to be small.
These wider costs are detailed in our information and impact note, published alongside the draft SI. We believe that the small costs to business that may result from this measure are justifiable in the context of ensuring that businesses make a fair tax contribution and, in particular, that stamp tax on shares is payable whatever method is used to effect a takeover. Furthermore, we believe that these reforms will not impact significantly on the level of takeover activity in the UK. Those takeovers that make commercial sense will still take place. I commend these regulations to the Committee.
I thank the noble Lord for his explanation. It was a quite complex technical analysis and I will boil it down to the simple question that will exercise most people’s minds. Are we confident that these regulations, as drafted, will not give rise to some evasion or avoidance scheme that will ensure that companies do not pay the stamp duty they are obliged to pay? At the end of the day, I suspect that that will be the acid test, or one of them. I look forward to the Minister’s response on that question but, other than that, we support the proposal.
I thank the noble Lord, Lord Young, for his support on this important legislation. Although it sounds complicated, it is straightforward. All we are asking is that companies that take over and acquire the entire share capital of a target company should pay their fair share of stamp duty. There were, effectively, many ways of avoiding this in the past and very few transactions were taking place. Lately, however, we have seen the number of transactions increasing. It is therefore only right that companies that take over other companies pay their fair share of stamp duty on the sale of the shares. It is a very small sum: one half of 1%. I thank the noble Lord for his support and commend the regulations to the Committee.
The position is no different from what I have just said. The regulations mean that, for new takeovers of UK companies, stamp duty will be payable on takeover. In other words, the cancellation scheme is no longer applicable. It will have to be a straightforward purchase—a transaction to acquire those shares. Hence, those companies have to pay their fair share of stamp duty.