Closing the Stamp Duty Loophole

Abstract

The purpose of this paper is to estimate how much revenue might feasibly be generated by closing loopholes in the UK Government’s stamp duty tax on share transactions. We focus predominantly on preventing abuse of intermediary relief (sometimes known as the market-makers’ exemption). We use estimates of the elasticity of turnover to an increase in transaction costs, estimates of turnover attributed to market-makers but related to the hedging of derivative transactions by hedge funds and other short-term traders rather than market-making activities and we sum all marginal transaction costs, including price-impact, dealing spreads, clearing and settlement costs. There is a tendency by industry participants to focus on only partial transaction costs, thereby exaggerating the impact of the tax on tunover. We estimate that taking into account the likely reduction in turnover, preventing abuse of the market-makers exemption would raise approximately £1.2bn to £1.8bn in additional tax revenues, leading to an increase in total revenues from £3.1bn to £4.3bn to £4.9bn.