Labour proposes 'transaction tax' on financial institutions

If elected following the 8 June general election, the party said it would introduce a financial transaction tax (FTT) on derivatives and bond trading and share dealing, which would be an expansion of the 0.5% stamp duty that already applies to share transactions.

Under the plans, financial institutions would pay a levy of 0.2% on derivatives transactions, and non-financial institutions would pay 0.5%.

Labour would also lift the current stamp duty exemption on 'market makers' or intermediaries such as hedge funds. Currently, institutions which provide market liquidity by being able to buy securities from individuals and professional corporate bodies can claim relief on all their share purchases.

Labour shadow chancellor John McDonnell told Sky News at the weekend the proposed FTT was a “small transactional tax” which would help fund public services. 

The policy pledge was set out after years of wrangling between the UK government and the EU over the latter's plans to introduce a FTT – a separate tax from Labour's proposal. Under the EU plans, the FTT would apply where financial instruments such as shares, bonds, securities and derivatives are traded between banks, and where at least one party to the transaction is established in a participating EU member state regardless of where the transaction itself takes place.

The EU FTT was first proposed in 2011, with details released in 2013, but its implementation has been repeatedly delayed.

In April 2013 the UK began a legal challenge against the proposals. The UK government claimed the tax would apply to UK firms trading with businesses based in a participating state even if the UK itself was not a party to the FTT. The EU's highest court, the Court of Justice of the European Union, dismissed the challenge as “premature”.

Tax expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com, said at the time of the legal challenge that the UK's objections were understandable.

“If the tax was to go ahead as planned, it would have a detrimental effect on the big financial institutions based in London when they trade in instruments or with parties established in one of the participating states. It was inevitable that the UK would object,” Walker said.