SDRT Customer Newsletter Issue No 9

December 2008

Stamp Duty Reserve Tax - Exemption for charities

HM Revenue & Customs (HMRC) Stamp Taxes has recently received a number of enquiries from clients of Euroclear UK & Ireland seeking clarification of guidance in the Euroclear UK & Ireland publication "Stamp Duty Reserve Tax - a guide to market practice", concerning the evidence that is required to be retained in support of a claim to exemption from Stamp Duty Reserve Tax (SDRT) where the underlying purchaser is a charity. Following consultation with various financial representative organisations, HMRC will be revising its current practice in terms of assurance testing and issues the following guidance, which includes new arrangements whereby fund/investment managers may assume responsibility for retaining evidence to support claims for SDRT charity exemption.

This guidance note will take effect from 1 April 2009 to allow fund/investment managers to forward a prior application seeking an approved arrangement with HMRC Stamp Taxes and be allocated a unique HMRC reference number, as outlined in this note.

Background

Where a charity buys chargeable securities, exemption from SDRT can be claimed. In practice, the exemption is secured by the exchange member or qualified dealer (as the 'accountable person' for SDRT purposes) who is purchasing the shares either directly on behalf of the charity, or on instructions from a fund/investment manager with an underlying client (or clients) who is a charity, and who would otherwise be accountable for the tax. When reporting the transaction to CREST, the exchange member or qualified dealer inputs the CREST Transaction Stamp Status (TSS) value 'S' and enters the HMRC Charities (formerly Inland Revenue FICO) or Charity Commissioners' reference number in the Charity ID field.

HMRC needs to be able to verify that the exemption claimed in this way is properly due and will want to be satisfied on two matters. An accountable person must be able to demonstrate that:

1. instructions to purchase shares have been received from a client that is a bona fide charity, or from a client acting for and on behalf of an underlying client that is a bona fide charity; and
2. checks have been undertaken to verify that the charity is, and continues to be, a registered charity and eligible for exemption from SDRT

The above two obligations placed upon an accountable person typically arise in the following scenarios:

a. An accountable person with a direct contractual relationship with a charity client

On a first claim to exemption, the accountable person must obtain a copy of the certificate issued by the Charity Commissioners or HMRC Charities. Where, however, an original Charity Commissioners' certificate has been lost or is unobtainable, HMRC will accept a letter on headed notepaper from the charity to the accountable person, giving the instruction to act and purchase the shares on its behalf, as satisfying this obligation.

The letter should also include the address and reference number of the charity. A letter of instruction from a charity registered outside England and Wales must, in addition, include the date of charity registration. The website of the Office of Scottish Charities Regulator does not provide this information for Scottish charities and as yet there is no governing body for charities established in Northern Ireland. The date of registration of these charities will therefore need to be provided to the accountable person by the charities themselves.

On subsequent occasions an accountable person must obtain, and keep on file, a print -out from the Charity Commissioners' website showing that the charity is still registered, and therefore eligible for SDRT exemption, at the time the securities are agreed to be transferred. Where the Charity Commissioners are not responsible for the charity, an accountable person is obliged to satisfy himself of his client's eligibility to tax exemption by obtaining, and keeping on file, a copy of the HMRC Charities letter from the client confirming charity status.

In strictness, an accountable person should ensure that a print-out from the Charity Commissioners website is obtained every time instructions to purchase securities for and on behalf of the same charity client are received. Where, however, an accountable person regularly buys shares for the same charity, it will be sufficient to obtain print-outs from the Charity Commissioners' website to check the charity's status periodically (but at least once every six months). An accountable person will need to be able to demonstrate to HMRC, upon enquiry, that a charity's status is being regularly checked in order to ensure that it remains eligible for exemption from SDRT.

When reporting a share purchase transaction undertaken on behalf of a recognised charity to Euroclear UK & Ireland, the exchange member or qualified dealer inputs the CREST Transaction Stamp Status (TSS) value 'S' and enters the HMRC Charities (formerly Inland Revenue FICO) or Charity Commissioners' reference number in the Charity ID field.

Where an accountable person is not in a position to satisfy himself that the instruction to purchase shares is undertaken on behalf of a bona fide charity client or charity clients, an accountable person must not allow a transaction with a charity 'S' exemption value to match and settle in the CREST system. In this situation, the accountable person must input into the CREST system, the standard rate Transaction Stamp Status 'P'.

Multiple charities

In the CREST Charity ID field, an accountable person must quote the Charity Commissioners' or HMRC Charities reference for all the charities. Where there is insufficient space in the field for all the references, at least one reference must be quoted, followed by the symbols '++' to indicate that more references are appropriate. In any enquiry by HMRC these will all need to be quoted.

b. An accountable person with a direct contractual relationship with a fund/investment manager acting on behalf of charity clients

Where an accountable person's client is a fund/investment manager (acting for and on behalf of a single (or multiple) charity client), circumstances can arise where the fund/investment manager may not be willing for client confidentiality, or other commercial, reasons to provide evidence to the accountable person that his underlying client is a bona fide charity that is eligible for SDRT exemption.

In these situations and with effect from 1 April 2009, a fund/investment manager may enter into specific prior arrangements with HMRC Stamp Taxes whereby the fund/investment manager, rather than the accountable person, agrees to retain and, upon any HMRC enquiry, make available records regarding the charity client and the instructions to purchase for and on behalf of the charity client.

After clearly establishing with the fund/investment manager that they have entered into such an arrangement with HMRC, the delivering accountable person must populate the Charity ID field of his Euroclear UK & Ireland instruction by inserting the fund/investment manager's unique HMRC reference, and complete the Transaction Stamp Status value with 'S' before the purchase transaction is allowed to be matched and settled in the CREST system.

In these circumstances, HMRC will expect to see evidence from the delivering accountable person that the fund/investment manager has agreed to this arrangement. This may be in the form of a letter or other similar instruction received from the fund manager advising of his/her unique HMRC approved reference and that the fund manager agrees to retain records regarding the charity client and the purchase undertaken for, and on behalf of, the charity client. Where the fund/investment manager's HMRC reference number is not input, the accountable person will be required to retain evidence on file to clearly demonstrate that the purchasing charity is eligible for exemption from SDRT.

HMRC Stamp Taxes will publish & maintain on its website a list of fund and investment managers along with their respective HMRC reference numbers falling within this arrangement.

View list of fund and investment managers

HMRC Stamp Taxes approved arrangements with a fund/investment manager

A fund/investment manager's application seeking an approved arrangement with HMRC must be headed 'Application for a HMRC Stamp Taxes fund manager reference in support of charity exemption', and include the full address and postcode of the fund/investment manager, contact name and telephone number. The application is to be sent to HMRC Stamp Taxes, SDRT Operations, 9th Floor, City Centre House, 30 Union Street, Birmingham B2 4AR. On approval, HMRC will allocate a unique reference number prefixed 'IMxxxx' to each fund or investment manager which must be quoted to an 'accountable person' whenever a charity exemption is claimed on a purchase transaction to be settled in the CREST system.

Fund and investment managers who have approved arrangements with HMRC are subject to the same requirements as an accountable person in that they have to satisfy themselves of the charitable status of their client. In the event of an HMRC enquiry, a fund manager must be able to demonstrate that the status of the underlying client who has purchased shares is that of a bona fide charity, and that the charity is, and continues to be, eligible for exemption from SDRT, by providing similar evidence to that outlined in a) above.

Failure by a fund/investment manager, upon HMRC enquiry, to provide information regarding a share purchase undertaken for, and on behalf of charity client, or failure to notify HMRC of any changes to the fund/investment manager's business activities as it affects charity clients, may lead to termination of the HMRC approved arrangement.

The accountable person will be accountable for payment of SDRT where a fund/investment manager has not retained evidence (or is unable) to verify the client's status or has failed to provide information upon any HMRC enquiry.

A fund/investment manager not electing to make an application to HMRC will need to provide the accountable person with similar evidence to that outlined in a) above. Where, on a claim to exemption, a fund manager is unable to provide an accountable person with an original Charity Commissioners certificate or HMRC Charities reference because it has been lost or is unobtainable, HMRC will accept a letter on headed notepaper from the charity to the fund manager which gives the instruction to act and purchase the shares on its behalf, being provided to the accountable person as satisfying this obligation. The letter however should also include the address and reference number of the charity along with the date of charity registration. Where a fund/investment manager is unable to provide evidence to demonstrate that the instruction to purchase shares is undertaken on behalf of a bona fide charity client or clients and no Charity Commissioners or HMRC Charities reference is provided to the accountable person, an accountable person must not allow a transaction with a charity 'S' exemption value to match and settle in the CREST system. In this situation, the accountable person must input into the CREST system, the standard rate Transaction Stamp Status 'P'.

CHIDIRLST procedure

With the introduction of the arrangement enabling a fund/investment manager to seek HMRC approval and be allocated a unique reference number that can be quoted to an accountable person when claiming exemption from SDRT in respect of a charity purchase, the current HMRC 'CHIDIRLST' procedure that is available and used by some fund managers and custodians is to be withdrawn with effect from 1 April 2009.

All current HMRC approved 'CHIDIRLST' users will need therefore to reapply to HMRC for a unique fund/investment manager reference number that must be quoted (instead of 'CHIDIRLST') to an 'accountable person' whenever a charity exemption is claimed on and after 1 April 2009.

Information and guidance on 'market norms' in processing charity purchase transactions as outlined in the October 2007 Euroclear UK & Ireland publication "Stamp Duty Reserve Tax in CREST: a guide to market practice" will be revised to take account of the above HMRC guidance with effect from 1 April 2009.

All enquiries regarding this HMRC Guidance Note should be sent to:

SDRT team

Birmingham Stamp Office.

9th Floor
City Centre House
30 Union Street
Birmingham
B2 4AR