Chancellor urged to axe stamp obligation on Britain’s small caps

 The Chancellor has been urged to slash stamp duty on shares outside of the FTSE 100 to revitalise the London market.

In a hard-hitting report into the ‘stark’ crisis facing Britain’s small companies, think-tank New Financial urged Rachel Reeves to take action after a ‘brutal’ few decades for UK-listed firms.

It revealed more than 600 companies worth less than £1bn have left the stock exchange in the last 20 years, saying smaller firms ‘have been hit hardest of all’.

Douglas Flint, chairman of asset management giant Abrdn, called on ministers to take action, saying the Government ‘cannot afford to ignore UK small caps’.

Crisis: The Chancellor has been urged to slash stamp duty after a ‘brutal’ few decades for UK-listed firms

Experts are calling for the abolition of stamp duty on all listed companies outside of the FTSE 100 – extending a tax break already granted to stocks on London’s junior market Aim.

It comes amid fears over the health of London’s stock market which has suffered from an exodus of companies in recent years.

Major firms including building materials group CRH and gambling giant Flutter, which owns Paddy Power and Betfair, have shifted their primary listings to the US. 

Cambridge-based chipmaker Arm snubbed the City when it chose to float in New York instead of London last year in pursuit

of a higher valuation. Experts, meanwhile, have weighed in on a debate over the future of AIM, which saw 76 companies exit last year.

The Tony Blair Institute, headed by the former Labour prime minister, last week called for the growth market to be abolished. The organisation said AIM had ‘failed’ in its purpose of providing a home for scaling businesses.

But the market also has fierce defenders who say it is integral for the growth of smaller businesses.

New Financial’s report laid bare the scale of the crisis facing London listed companies with a market capitalisation of less than £1bn on both AIM and the main market.

In seven of the past ten years, more smaller listed companies left the UK stock market than joined it.

A significant factor has been a ‘breathtaking’ collapse in demand from both institutional and retail investors, with UK pension funds shouldering much of the blame, the report said.

Just one Local Government Pension Scheme still has a specific allocation to smaller UK firms compared to 18 in 2013. And August was the 36th consecutive month of net outflows from UK smaller company funds.

But despite the challenges, small caps have delivered ‘stellar returns’ over the long-term, New Financial said.

Over the last 25 years, smaller companies, including those listed on AIM, generated an annualised total return of 7.4 per cent – in line with Wall Street’s S&P 500 and nearly 50 per cent higher than the wider UK market.

Abrdn, which backed the report by New Financial, said stamp duty on UK shares should be scrapped entirely, but said beginning with firms outside of the FTSE 100 would be ‘a good starting point’.

The levy forces investors to pay a 0.5 per cent tax when buying British shares, even though they pay nothing if they put money into foreign firms.

It also called for minimum pension contributions via auto-enrolment to ‘go up significantly’ and for a simplification of the UK’s ‘cumbersome’ ISA system.

And the asset manager said the Government should launch a national campaign to get the UK investing and shake-up financial education in schools.

Flint said: ‘Smaller listed companies are an integral part of the UK economy.

‘They drive innovation and generate wealth and jobs across almost every corner of the country. Given that the Government is serious about boosting UK growth, we must look carefully at the small cap sector and the findings and recommendations of this report.

‘If policymakers consider what can be done to boost investment in the UK generally, we cannot afford to ignore UK small caps.

‘This segment of the market is flourishing in many respects, and, with appropriate action, it could be even more successful.’

The Chancellor is thinking of scrapping inheritance tax relief on AIM shares in the Budget later this month, which the Institute for Fiscal Studies said could raise £1.6billion a year.

But experts have said that removing the tax break could stifle growth.

Robert Forrester, chief executive of car dealer Vertu Motors, which listed on Aim in 2006, said: ‘If you’ve got a growth agenda [then], taking away a pool of capital from a junior market that has a major benefit for growth companies is a very quizzical strategy.

‘We have used the AIM market [to raise funds] and we have created an inordinate amount of good jobs across the UK.

‘Could we have done that without the AIM market?

‘Probably not.’