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Headline: Stamp duty - the bane of UK securitizations
Source: Euromoney
Date: May 2000
Author: Mark Kessell
UK securitization deals rarely result in the payment of stamp duty, but in theory it is liable to be charged. So provision has to be made for the tax, to the detriment of the industry's development. The UK's asset-backed industry should be lobbying for a change, in the government's forthcoming Finance Bill. By Nigel Page
In the run-up to the recent UK budget, considerable attention was given to a likely increase in stamp duty. Most reports concerned the effect on residential property transactions and on share dealing, but there was also concern about the UK securitization market.
When chancellor of the exchequer Gordon Brown presented his budget in mid-March, the UK securitization industry was confronted with an unwelcome, if widely predicted, development. Brown did indeed raise stamp duty and no mention was made of any forthcoming exemption from notional payment of this tax in securitizations.
As things stand, stamp duty is not paid on securitizations except in rare circumstances but companies have to put aside large sums to provide for the possibility of stamp duty liability.
David Trott, a securitization partner at international law firm Freshfields, who was actively involved in the industry's pre-budget lobbying, says: "This is inefficient, makes transactions more expensive than they should be and is currently stifling the UK securitization market to the detriment of companies, consumers and shareholders. This further increase in stamp duty has in all likelihood further eroded the attractiveness of this form of financing. As the stamp duty is notional and not paid, an exemption would not cost the exchequer and would bring the UK more into line with its European competitors."
Securitization has acquired a reputation for complexity that is far from justified. In essence it is a way in which companies can raise finance without resorting to traditional bank lending.
Money is lent to a company on the strength of the income or assets (receivables) it can expect to receive in the future, from such flows as rental income, leases, consumer finance loan repayments, or on the production and sale of manufactured items such as car parts that are delivered as regular flows.
It is big business in Europe nowadays, and it is there that most of the more innovative structures are being put together by lawyers and bankers. The US asset-backed market is enormous but relatively long established and somewhat commoditized. In Europe, deals stand or fall according to the ingenuity of their structures and the ways in which applicable tax regulations and laws are applied.
The market for these deals in the UK is second only to that in the US, with some £17 billion ($27 billion) of debt securities being issued in 1999 alone. However, many of the continental European jurisdictions are catching up fast, since they have introduced user-friendly legal frameworks enabling securitizations to be easily used by their corporate sectors.
Since its earliest days in the UK in 1986, securitization has become increasingly important as a way in which companies can gain access to the cheapest funding, whatever their credit rating.
Wholesale capital markets financing can be significantly cheaper financing for companies than traditional bank lending. In the past year, one corporate financier arranged transactions for organizations as diverse as property company British Land, mortgage lender Britannia Building Society, entertainment venue operator Tussauds Group, mail-order retailer Great Universal Stores, Paramount Hotels and credit card provider MBNA.
At present, explains Trott, stamp duty applies not just to property sales, but also to transfers of other kinds of assets (including receivables). "At present," he says, "for a securitization transaction to go ahead, the lender requires provision for stamp duty to be deposited in cash, in order to cover any potential liability that might arise.
"However, securitization transactions are merely financing arrangements and, in practice, stamp duty is not paid because the arrangements are structured so that documents are created under which receivables are actually sold to the lender (and on which stamp duty would be payable) only in very rare circumstances."
This latest increase in stamp duty could significantly damage the UK industry, Trott says. "As stamp duty has increased over the years," he says, "the amount that companies need to put aside to cover the theoretical stamp duty liability as part of securitization transactions has also increased. Securitization has been caught in the crossfire of increases in stamp duty for policy reasons unrelated to corporate finance."
This has resulted in securitization in the UK market becoming more expensive, and therefore less attractive to companies, despite its very obvious advantages over some other forms of finance. As things now stand, UK companies must provide up to 4 per cent of the value of the transaction in cash - an unnecessary and inefficient expense.
The reasons for granting an exemption are persuasive but apparently still not sufficiently so for the UK chancellor. Probably the key benefit would be that UK companies need access to cheap finance if they are to grow efficiently.
If they can raise finance more cheaply, they can offer goods and services more cheaply and boost shareholder returns. Securitization also provides an important tool for financing growth to those companies that would otherwise be unable to access the capital markets in their own right because of insufficiently high-grade credit ratings.
Perhaps most crucial for lawyers and financial advisers to these deals in the UK, however, is the fact that other countries are investing time and money in developing specific regimes that actively encourage these deals.
Securitization is seen by many as the financing tool of the future and the UK needs to keep up its competitive advantage instead of looking for ways to make the process less attractive. Certainly, the interests of UK lawyers in pushing for an exemption are not entirely altruistic.
They risk losing out to continental European competitors in this sector - other major EU countries do not require stamp duty to be paid, nor do they require a cash provision for possible liability to be set aside.
As Trott says, if an exemption was granted: "The cost implications would be neutral, as stamp duty is not paid on securitization transactions. Indeed, with the consequent growth of the market, the exchequer would benefit in other ways, for example, from VAT receipts on items associated with transactions."
If, however, exemption is not granted, it is inevitable that many UK companies will be put off using securitization as a method of raising finance. They will instead be forced either to forgo raising finance altogether, or to use alternative - and more expensive - funding methods.
Freshfields' Trott concludes by highlighting the next concerted focus for his lobbying initiative: "Exempting securitization transactions from the theoretical stamp duty liability could be achieved by means of a provision in the forthcoming Finance Bill - and that is what the whole UK asset-backed industry must push for."
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