The recent First tier Tribunal decision in HSBC Holdings and Bank of New York Mellon Corporation v The Commissioners for HMRC contains good news for companies located in Europe seeking to raise capital. Specifically, the decision confirms that:
- A capital duty in accordance with the EU Capital Duty Directive (the Directive) is the only tax that may be imposed by EU Member States on the raising of capital by EU companies.
- The Directive is to be construed purposively, not literally.
- The levying by the UK of Stamp Duty Reserve Tax (SDRT) in respect of the issue of depositary receipts (including American Depositary receipts, ADRs), under section 93 of the Finance Act 1986, infringes EU law (Articles 10 and 11 of the Directive) if the imposition is in connection with the raising of capital by an EU company, even if the depositary happens to be in the US or elsewhere outside the EU.
HMRC cannot rely on Article 12 of the Directive (which leaves untouched the power of Member States to impose taxes on the transfer of securities) to preserve the SDRT charge, if the transfer is an integral part of a raising of capital from investors by a company issuing shares. In determining whether a transfer is an "integral part" of the raising of capital:
- It is irrelevant that the capital-raising transaction could have been, but was not, structured so as not to include a transfer; and
- The taxpayer's motive in structuring the transaction as he did is immaterial: the test is objective.
- A reference of the point of European law which is raised by this case to the European Court of Justice was not appropriate.
Action that UK companies need to take now
If your group has been involved in capital-raising using ADRs or other depositary receipts instead of shares, whether to fund an acquisition or just to raise cash you should make a claim against HMRC for repayment of any SDRT paid, whether the claim is in time (under the SDRT Regulations) or not. We have made claims on behalf of clients and the process is a simple one.
It is likely that the SDRT charge currently levied on the issue of any chargeable securities of a EU company into a non EU based clearance service would also be rendered illegal as a result of this decision.
Raising capital going forward
Going forward, companies should be able to structure raising of capital within the and outside the EU without triggering the 1.5% SDRT charge, assuming that the case is not overturned on appeal.
HMRC has indicated that is considering seeking permission to appeal the decision. Until this decision is made, HMRC has confirmed that it will not make any repayments of SDRT. If the Tribunal decision is final, HMRC will publish guidance about how claims for repayment of the incorrectly paid SDRT should be made.