In February 2012 the UK First-tier Tax Tribunal determined that the 1.5% stamp duty reserve tax charge on the issue of shares of an EU company to a depositary receipt system in the US was in breach of EU law.
HM Revenue & Customs have now announced that they do not intend to appeal the Tribunal’s decision and accept that they can no longer collect the 1.5% SDRT charge on the issue of UK shares into a depositary receipt system or a clearance service, regardless of the location of the depositary receipt system or clearance service.
Taxpayers who have incurred the 1.5% charge should consider whether they are entitled to a refund, plus interest, of the SDRT. Taxpayers who incurred the charge within the last 4 years are eligible for a refund of overpaid SDRT under UK statute. Taxpayers who incurred the charge outside this timeframe may also be entitled to a refund under common law.
The UK courts have traditionally awarded simple, rather than compound, interest on repayments of tax. However, the European Court of Justice is currently considering whether repayments of tax required by EU law should be made with compound interest.
On 28 February 2012 the UK First-tier Tax Tribunal determined that the 1.5% “season ticket” charge to SDRT on the issue of shares of an EU company to a depositary receipt system in the US was in breach of EU law1. The taxpayer argued 2 alternative grounds of EU law. Firstly, that the charge was unlawful under the Capital Duties Directive, which prohibits tax on the issue of new shares in connection with the raising of capital. Secondly, that the charge contravened the free movement of capital provisions of the EC Treaty (on the basis that the transfer of shares in an EU company by a non EU-resident investor to an investor in the EU was a cross-border movement of capital).
The Tribunal’s decision follows the October 2009 judgment of the European Court of Justice2 that the 1.5% season ticket charge on the issue of shares into a clearance service within the EU was contrary to EU law. The judgments are discussed in more detail in our client memoranda of 6 October 20093 and 5 April 20124.
HM Revenue & Customs initially adopted the narrowest possible reading of the 2009 judgment, i.e. that only the 1.5% SDRT charge on the issue of shares or securities into a clearance service or a depositary receipt system within the EU was disapplied. However, February’s decision extends this principle to clearance services and depositary receipt systems outside the EU.
The collective effect of the two cases is to disallow the 1.5% SDRT season ticket charge on issues of shares or any other types of security attracting the season ticket charge to a clearance service, or to a depositary receipt system, in any jurisdiction, so long as the entity seeking to raise capital is established in an EU member state.
HMRC maintain that the 1.5% SDRT charge will continue to apply to transfers to a clearance service or a depositary receipt system that are not an “integral part of an issue of share capital”5. While the Tribunal applied the “integral” test when considering arguments of invalidity under the Capital Duties Directive, HMRC’s position appears to overlook the alternative ground of invalidity under the EC Treaty. In its February decision, the Tribunal found that even if the SDRT charge was not unlawful under the Directive, it would have been prohibited under the free movement of capital provisions of the EC Treaty on these particular facts. The EC Treaty ground of invalidity does not require a link to a capital-raising, but requires a discriminatory and unjustifiable restriction on the cross-border movement of capital. Taxpayers may wish to consider whether to use this argument to challenge further the 1.5% SDRT charge on transfers to a clearance service or a depositary receipt system.
CHANGE IN LAW?
HMRC have not proposed any changes to the SDRT legislation to reflect the decision, or to deal with its consequences. In particular, notwithstanding the removal of the 1.5% season ticket charge, the exemptions for transfers of shares within a clearance service and within a depositary receipt system continue to apply. This may change in the future. At present, clearance services may opt to be exempt from the season ticket charge in return for ensuring that SDRT is paid at 0.5% on each transfer within the clearance service. This could be made mandatory. However, this would be a major change raising significant compliance issues. It is therefore unlikely to be happen soon, if at all.
Taxpayers that have incurred the 1.5% charge on the issue of shares into a clearance service or depositary receipt system should consider whether they are entitled to a repayment, with interest, of the SDRT.
SDRT PAID WITHIN THE LAST 4 YEARS
UK statute allows overpaid SDRT to be reclaimed from HMRC up to 4 years from the date on which the SDRT was paid (or when it was due, if later). HMRC’s announcement of 27 April sets out the documents HMRC expect to see with a refund claim.
SDRT PAID MORE THAN 4 YEARS AGO
If a claim under statute is time-barred, a taxpayer may be able to bring a claim on the basis that the UK contravened EU law.
Taxpayers could claim for damages within 6 years of the payment of SDRT on the basis that there was a breach by the UK of its statutory duty to give effect to provisions of EU law. However, this would require them to demonstrate that there has been a “sufficiently serious breach” of EU law, which is a very high standard and may not be satisfied here. It would not be enough that the UK failed to appreciate that it might not have been complying with EU law: it must have known that it wasn’t complying.
Alternatively, a taxpayer could claim restitution to correct the unjust enrichment of HMRC at the expense of the taxpayer where SDRT has been unlawfully demanded or paid under a mistake of law. While the point is likely to continue to be debated in the courts, including in the ECJ, the leading UK authority to date suggests that a claim in restitution, like a damages claim, should be brought within 6 years of the payment of SDRT6.
QUANTIFYING THE AMOUNT TO BE REPAID
Where a taxpayer has claimed a remedy set out in statute, and the relevant statute provides only for simple interest, that is all the UK courts have awarded. On its face, the relevant SDRT statutory instrument provides for simple, not compound, interest on overpaid SDRT.
However, EU law requires that the taxpayer’s remedy is effective. The ECJ is shortly to deliver its judgment on whether simple interest is an effective remedy for overpayments of VAT7. The position for SDRT is likely to be the same as for VAT.
In common law claims, a taxpayer should be entitled to compound interest for a claim in restitution. It is an established principle that the person unjustly enriched should transfer the full benefit of the unjust enrichment to the claimant.
If a taxpayer is entitled to compound interest, it is not yet clear whether the Tribunal is competent to grant it. Until the ECJ has spoken, it may be advisable to bring an action before the UK High Court in order to seek an award of compound interest. An action in the High Court can be brought simultaneously with an appeal to the Tribunal.