Brokers face large stamp duty bills on CFDs

Dublin stockbroking firms face multi-million-euro tax bills after a Revenue move to seek retrospective payment, with interest and penalties, of stamp duty levies that should have been charged on contracts for difference, one of the most popular investment products.

The move has prompted considerable disquiet among the firms, who have been called by the Irish Stock Exchange to a special meeting this morning to consider their position. The exchange will meet the Revenue next week to discuss a "clarification" on its stamp duty policy that was circulated to stockbrokers on St Patrick's Day.

Contracts for difference (CFDs) are a form of derivative instrument that enables an investor to take a position on a stock - and its likely performance - without actually owning shares. Such trades can be risky but they were deemed attractive, at least until last Friday, because they were considered exempt from the 1 per cent duty on share trades.

The contracts have grown in popularity to the extent that they account for at least 15 per cent of trading in the Dublin market, with €500-€1,000 million in play at any time. Senior market sources said there had been a big fall-off in trading this week after brokers told clients they must pay stamp duty.

The move to inform brokers of the Revenue policy on a bank holiday, via the Crest settlement system, surprised many in the market. But it was the threat of retrospective liability - which could amount to millions, according to brokers - that prompted the meeting today.

Some in the market suggest that the possible long-term liabilities would be enough to put firms out of business. The Crest circular says the relief from stamp duty on "derivative instruments" that applies to stockbrokers cannot be applied to their clients.

It also says stamp duty relief cannot apply on "rollover" trades, where contracts for difference are sold and repurchased as a way of holding a position for the long term without paying stamp duty. Brokers said this was the area in which the biggest liabilities would fall.

Revenue's spokesman said last night that the policy was clarified after queries from brokers. "The point to be made is that these aren't new regulations. We're merely clarifying the position."

While Revenue is empowered under Section 159 of the 1990 Stamp Duty Act to demand payments going back four years, the spokesman declined to quantify the potential liabilities or specify the period for which payment will be sought. "In terms of how far back we will go in terms of liability, we will approach this on a case-by-case basis, as well as meeting next week with the Stock Exchange to tease out the issue. We'll also be engaging with individual brokers."