Who Pays The Piper? -- I

REG NOCK, barrister, discusses the new compliance régime for stamp duty purposes.

THE NEW COMPLIANCE régime for stamp duty contains many traps for the unwary which are beginning to emerge on a wide-ranging scale. These traps have become even more significant because of the ruling by the Bar Council that it is no longer contrary to the rules of etiquette to take stamp objections to the other side documents in litigation. The effect of the Bar Council ruling represents a fundamental change in the role of advocates and barristers advising, since any solicitor or accountant instructing counsel in relation to the advising upon a transaction will now have to raise questions of stamp duty.

Failure to raise the stamp questions at the earliest possible stage will now almost certainly be professional negligence, even in cases currently being litigated; since the Bar Council has not included any transitional provisions for any case actually being tried on or after the announcement on 1 August 2001. The advocate is under the duty to protect his client by taking the stamp duty objection whenever possible or to warn the client of the stamp duty risks concerning the documentation which is part of his evidence should the other side spot or the judge spot the point.

Even at the start of the planning for a transaction, failure to advise by counsel or any professional adviser in relation to potential stamp duty risks is vulnerable since the matter may go to litigation and failure by those instructing counsel to ask for the stamp duty advice in relation to evidence issues clearly invites attack from persons who have been put to expense that they did not expect to incur or who could have taken steps to protect themselves against the risk.

This week's instalment looks at the background to the problems in the context of the new compliance régime. A second instalment, scheduled for next week's issue of Taxation, will look at the issues affecting persons who are not parties to documents but are now exposed to the risk of stamp duty, late presentation penalties and the late payment interest charge and who are clearly now required to carry out more rigorous investigation into the stamp duty position of documentation upon which they may have to rely. A final instalment will look at the compliance problems for third parties and the extension of the obligations arising upon professional advisers in the régime produced by the Bar Council's ruling.

Traps in the new compliance régime

The Finance Act 1999 made two basic changes in relation to the compliance régime; namely:

• Late stamping penalty: the restructuring of the late presentation penalties, i.e. those penalties which arise where a document is not produced to the Inland Revenue Stamp Taxes Office within thirty days after execution or first being brought into the United Kingdom when executed abroad. There is a recent Inland Revenue Stamp Taxes Office indication that if a document is not presented within about two years after execution then, in the absence of a very good reason for not doing so, the full penalty equal to the amount of the duty will be charged.
• Late payment interest: the introduction of the late payment interest charge (recently reduced to 7.5 per cent non-deductible) i.e. the charge which applies where stamp duty is not paid or deposited with the Inland Revenue Stamp Taxes Office within thirty days after execution. This charge applies even where the document is executed and retained offshore (with a limited exception for agreements for lease but subject to the problems discussed later). This interest charge has taken some people by surprise. Moreover, its existence is becoming oppressive, particularly where claims for exemption or basic issues are involved as the Inland Revenue Stamp Taxes Office is clearly gearing up for yet another assault on section 42, Finance Act 1930 (as amended).

There is a claim in the new Stamp Taxes Bulletin Issue 1, August 2001 that documentation will be turned around within five days, but on larger transactions this is not being achieved due, it would appear, in some cases to illness and holidays or in at least one case where the explanation appears to be that the Inland Revenue Stamp Taxes Office believes that there should be a liability but cannot see where or how it arises. Parties seeking an adjudication are therefore faced with difficult decisions as to whether to deposit the stamp duty to cancel the interest charge before the Inland Revenue Stamp Taxes Office is prepared to indicate whether it believes there is a charge. The parties have to assess the risks and make sensible commercial decisions on whether to deposit the stamp duty in order to avoid or reduce the late payment interest charge before the Inland Revenue Stamp Taxes Office is prepared to make a decision.

Consequential change

A consequential change, which attracted little attention at the time, was the removal of the table in the original section 15, Stamp Act 1891 concerned with identifying those persons who were liable to penalties. This list remains in force for documents executed before October 1999 with all the problems as to whether a penalty can be claimed if someone other than the person named in the list presents the document.

The implications of removal of the list for current documentation are far-reaching and extremely subtle when coupled with the Bar Council's removal of the restriction upon taking stamp duty objections to the other side's evidence in litigation in the United Kingdom. This now raises very fundamental questions as to the due diligence process and the giving of advice at all stages of a transaction, particularly in relation to the relationship with any person who may subsequently be the advocate in any litigation which may arise since the effect of section 117, Stamp Act 1891 is to render void many arrangements that parties may wish to undertake in order to overcome this difficulty.

Liability for stamp duty

Agreements for sale

Paragraph 7 of Schedule 13 to the Finance Act 1999, which deals with those written agreements for sale that are subject to stamp duty, provides that the purchaser is liable to stamp the document. This raises an interesting question as to whether a vendor who presents a document which a purchaser has failed to stamp is liable to pay the stamp duty. There is a basic question of whether a vendor can stamp the document. However, it would be manifest nonsense if he could not stamp and be denied the right to enforce the contract. If he stamps the written agreement, there is the question, whether having paid the stamp duty contrary to the provisions of paragraph 7 the vendor is entitled to some form of indemnity because he has paid the other side's obligation. The fact that the purchaser's obligation is not enforceable by the Inland Revenue Stamp Taxes Office raises some interesting questions as to equitable relief in the circumstances which, currently, remain unanswered.

It does not, however, go on to deal with the situation of where a conveyance is executed pursuant to that document, especially where it does not relate to property that is within the charge to stamp duty under paragraph 7. Obviously, since the contract is the primary stampable document, and there is no right to insist that the subsequent conveyance is stamped rather than the document, then as regards items such as equitable interest, book debts, insurance policies, the benefit of contract and goodwill, the liability for the stamp duty falls upon the purchaser. The problems for vendors or third parties in litigation with the seller is how to make the liability stick with the purchaser pursuant to paragraph 7 of Schedule 13 to the Finance Act 1999 if they are required to pay the stamp duty and penalties which for commercial agreements are now the full amount and not the reduced penalty which applied before October 1999.

Bearer instruments

There is, in Schedule 15 to the Finance Act 1999, a complex procedure identifying those persons dealing with bearer instruments who are liable in respect of the duty and any penalties arising under that special régime.

Other documents

Apart from the above provisions, however, there is nothing in the Stamp Act to identify the person liable for the duty. No doubt purchasers who wish to register their title and obtain protection have an incentive to present and stamp the document but there is no obligation upon them to do so and stamp duties remain, in general, unenforceable in terms of litigation by the Inland Revenue Stamp Taxes Office.

The basic position is, therefore, that whoever presents the document is liable for the stamp duty.

Late presentation penalties

As indicated above, the table for persons subject to late stamping penalties has been removed. This leaves open the question as to who is accountable for the penalty where a document is presented outside the relevant thirty-day limit. There is nothing to link the payment of stamp duty to the payment of a penalty, although it is clear that a penalty can only be levied if the document is presented for stamping. Whilst there are procedures for enforcing certain of the administrative penalties that replace the old system of fines, such as not fully and truly setting forth all relevant information pursuant to section 5, Stamp Act 1891 (as amended), there is nothing similar for late stamping penalties. There is no procedure to create late stamping penalties unless the document is presented.

The absence of the list would suggest that whoever presents the document is liable to the penalty even though not a party to it. There being no official victim for this levy, then the equitable right of indemnity for meeting someone else's obligation would appear to be dead in the water particularly where there is a statutory restriction upon indemnities..

Mitigation of penalties

It is provided that the Inland Revenue Stamp Taxes Office has power to mitigate penalties and it has indicated that it will do so provided that there is not too great a delay. There is also a provision that there is to be no penalty where there is a reasonable excuse for not presenting the document within the prescribed thirty days. There is a right to appeal against the imposition of the late stamping penalties if the person in question thinks he has some reasonable justification or he believes the amount of the penalty is excessive. The question is how far a person who is not a party to a document can be excused the penalty or have it mitigated.

It is suspected that if a person puts forward an argument that he should not be liable to penalty, or the penalty should be reduced because he was not a party to the instrument, this will meet with very short shrift not merely from the Inland Revenue Stamp Taxes Office but also any appeal tribunal. There is the obvious and pretty powerful retort that the person concerned should have thought about the stamp duty position before embarking upon his transaction. It is perfectly open to a person who suspects that documents are unstamped to refuse to rely upon them and require the party to get them stamped; this right is protected, for example, by section 117, Stamp Act 1891.

A person who fails to take these basic precautions can be met with the argument that, as he was prepared to take the risk that there might be some stamp duty lurking in the background, he was also prepared to take the risk that he might be required to pay substantial sums to the Inland Revenue Stamp Taxes Office in order to protect his position. People are free to act upon the basis of unstamped documents and take the risk that they may have to justify their conduct by stamping late under penalty or interest (Marx v Estates and General Investments Ltd [1976] 1 WLR 380), but it would seem not unreasonable that if the risk does materialise then they cannot really complain if substantial penalties are imposed.

Late payment interest charge

Once again there is no indication as to any person being responsible for the late payment interest charge. It would seem, therefore, that, as with the late presentation penalty, the person who presents the document is the person who picks up the bill without any right of indemnity against a purchaser or lessee.

Mitigation

This charge is mandatory and there is no power to mitigate the late payment interest charge even where the delay arises simply because the Inland Revenue Stamp Taxes Office cannot make up its mind as to liability, exemption or quantum. The fact that the person is not a party to the instrument would not appear to have any limiting effect on the accrual of the interest.

Reg Nock is a member of chambers at 24 Old Buildings, Lincoln's Inn; telephone 020 7242 2744.

Issue: 3824 / Categories: