Financial markets: types of financial brokers and dealers: principal broker dealers
Principal broker dealer
The role of the principal broker dealer is to manage their own “pool” of securities, buying from and selling to clients from that “pool”. The principal broker dealer does not therefore provide a service of purchasing or selling securities on behalf of clients. The principal makes its profit on the “turn” in the price, i.e. by selling for more than he bought or vice versa. On any contract note with a client, it must indicate the business capacity in which the broker dealt, i.e. principal.
Intermediary broker dealer
An intermediary dealer broker, or inter-dealer broker, is a broker who acts as a ‘middleman’ exclusively to market makers or broker dealers who wish to trade anonymously.
Implications of MiFID II
This guidance refers to the Stamp Duty and Stamp Duty Reserve Tax (SDRT) implications of the changes concerning payment for research following the introduction of Directive 2014/65/EU (MiFID II) from 3rd January 2018 (See STSM121050).
Where a principal broker dealer sells securities to a client (i.e. principal sale/client purchase), any separate charge such as commission, “mark-up” etc. shown on a contract note issued to the client is regarded as forming part of the consideration paid for the securities for Stamp Duty or SDRT charging purposes.
With the introduction of MiFID II, any fees for research made by a principal broker dealer must be priced and charged separately from execution services and either not shown on the contract note, or where shown, recorded as ‘research’.
Accordingly, any such charge made for research in adherence with the requirements of MiFID II will not be regarded by HMRC Stamp Taxes as forming part of the stampable consideration paid for the transfer or agreement to transfer securities.
Where a research fee is charged, but it is not able to be separately ascertained or disclosed initially at execution, Stamp Duty or SDRT is due on the total consideration paid for the shares.
In such a situation, when the research fee included in the consideration is subsequently identified a refund application may be made to HMRC seeking a partial refund as appropriate.
Any such claim must be supported by adequate evidence, which must be sufficient to link the research fee to the relevant transaction upon which a refund is being claimed. If multiple transactions are covered by a single aggregated research fee, this will need to be explained and evidenced accordingly.
Information on how to apply for a refund of SDRT is available on the HMRC pages of the gov.uk website: https://www.gov.uk/guidance/stamp-duty-reserve-tax-getting-a-refund