Merged market puts pounds 3bn tax in jeopardy

TREASURY income from stamp duty on shares - around pounds 3bn a year - is threatened by the creation of a pan-European stock market.

Leading London investment houses are pressing the Treasury to abolish stamp duty because it will place the City at a competitive disadvantage once the pan-European stock exchange is established. The UK taxes share transactions of individual investors at 0.5 per cent, while Germany abolished stamp duty on shares in 1990.

The impending merger of the London Stock Exchange and the Deutsche Borse has made the problem more urgent. Unless the tax system is changed, trading in UK stocks could be routed through Frankfurt once merged operations begin.

One solution would be to negotiate a common stamp tax as part of the City-Frankfurt merger. But it will not be easy to achieve. Stamp duty was abolished in Germany after a long campaign and would be difficult to reimpose, while the Treasury is unlikely to remove it on share trading in the UK. As one official remarked: "It is one of the least painful ways of filling the state's coffers."

Behind the scenes, leading City firms and the London Stock Exchange are lobbying hard. They are backing an initiative launched in May by the European Commissioner for the Single Market, Mario Monti, to eliminate discriminatory taxation in financial services.

Mr Monti said: "The introduction of the euro requires member states to make their markets more flexible and efficient. We have to increase the efficiency of our taxation systems and avoid harmful fiscal competition."

Last Wednesday, Gavin Casey, head of the London Stock Exchange, and Werner Seifert, the head of the Deutsche Borse, unveiled their latest merger plans to representatives of leading investment houses in London and Frankfurt.

In a move that prepares the ground for a full merger, members of one exchange will be able to access the other directly from 1999. To improve liquidity and lower trading costs, British stocks will only be traded in London and German stocks only in Frankfurt. In the first instance, the agreement will cover the 2,000 stocks traded by the Xetra trading system in Frankfurt and the 134 stocks marketed through the Sets electronic system in London.

Market participants welcomed the announcement, which paves the way for high liquidity and heavy trading in leading European companies. Some smaller stockbrokers in London were critical, however, about the costs they might face on trading in German shares.

A spokesman for the Paris Bourse, which has taken umbrage at the Anglo- German alliance, poured cold water on the latest development.

He said: "I don't see what this does for investors who want to participate in a pan-European market."