In a case last week, HSBC Holdings plc and Vidacos Nominees Ltd v HMRC (C-569/07), the European Court of Justice (“ECJ”) held that the 1.5% UK stamp duty reserve tax ("SDRT") charge on the issue of shares into EU clearance systems is illegal. The SDRT previously paid must be repaid.

HM Revenue & Customs (“HMRC”) have accepted this decision, but for now consider it applies only to the issue of shares into EU clearance systems.

The judgment may have wider implications, and could well also apply to:

  • 1.5 % Stamp Duty and SDRT on issues and certain transfers following issue of securities to a depositary backing the issue of depositary receipts, including American Depositary Receipts (ADRs)
  • 1.5% Stamp Duty on the issue of bearer securities

As explained below, there is also an argument against the imposition of 1.5% Stamp Duty and SDRT on any other transfer of securities to a clearance service or issuer of depositary receipts, including ADRs.

Companies affected by the decision should consider making refund claims as soon as possible. The time limit for such claims is unclear, but they may in practice be unlimited.

Repayments arguably should carry the right to compound interest.

ECJ Judgment in HSBC

HSBC plc, a UK incorporated company, sought to acquire a French company and offered shares as consideration. To make this more attractive to French shareholders, HSBC decided to list the consideration shares on the Paris Stock Exchange. As was common with such listed shares, these shares were issued into the clearance service associated with the Paris Stock Exchange.

SDRT is normally imposed at a rate of 0.5% on agreements to transfer certain kinds of securities (including shares of a UK incorporated company). However, where such securities are transferred or issued to a provider of clearance services, then unless the provider has agreed with HMRC to apply the normal 0.5% charge on transfers within the clearance system (and such agreement is unusual), the provider instead is subject to a one-off SDRT charge at a rate of 1.5%. Typically, the company issuing the shares agrees to bear the 1.5% entry charge. HSBC plc accordingly paid the £27 million SDRT charge on the issue of its shares to the clearance service.

EU law can place restrictions on the tax laws a Member States, such as the UK, and in HSBC’s case, Article 11 of Directive 69/335/EEC (the "Directive") forbad the imposition of taxes like SDRT (and duties like stamp duty) on the issue of securities by a company, though Article 12 of the Directive permitted Member States to impose taxes and duties on a transfer of securities.

The UK Government argued that the one-off SDRT charge was effectively a tax collected in anticipation of future transfers of shares and so within the Article 12 permission to tax share transfers.

The ECJ rejected this argument, and held the charge was invalid. It held that to interpret Article 12 of the Directive as permitting this 'season ticket' tax and charging it on the issue of the shares would effectively deprive of all practical effect the prohibition of taxing issues in Article 11 of the Directive. Moreover, it was not realistic to regard the SDRT paid by HSBC plc as applying to hypothetical future transactions: those future transactions might involve different persons and different prices, and so the tax could not be regarded as paid in respect of them.

The ECJ also appeared to confirm that prohibition of tax and duties on issue contained in Article 11 would apply to operations that “form[ed] an integral part of an overall transaction with regard to the raising of capital”. It unsurprisingly considered this included the clearance services’ acquisition of the securities immediately consequent upon their issue.

Government position

In a statement issued after the decision was handed down, HMRC confirmed that it was:

"considering the judgment in detail. The Government's policy position remains that transactions involving UK shares should bear their fair share of tax. In light of [today's] judgment, we will determine whether and how to amend the [SDRT] rules to ensure movements of shares into and within clearance services bear their fair share of tax... With immediate effect, HMRC will not seek to apply a 1.5% SDRT [charge] on the issue of shares into a clearance service within the European Union to which a 1.5% charge would previously have applied".

HMRC also confirmed that legislation will be introduced at the "earliest opportunity" to abolish the SDRT charge on issues into EU clearance systems but which would also "ensure that movements of securities between different systems will still bear their fair share of tax". The press release made no reference as to how taxpayers can apply for a refund or when such claims, in HMRC's view, may be time barred.

It should be noted that HMRC explicitly limited their 'concession' to within the EU. They also implied that they did not believe that the decision extends to the issue of shares into non-EU depositary receipt systems, namely ADRs. Given this stance, it seems likely that HMRC will be concerned to ensure that any legislation will prevent taxpayers from avoiding UK tax by routing securities intended for the US market through EU clearance services. As noted below, it is far from clear that any of this is correct.

Until the legislation is published, uncertainty remains as to how the UK Government will implement the ECJ's judgment. It is HMRC's stated intention that tax will continue to be levied on all transfer of securities, although it is far from clear how it will achieve this and still be within the confines of the decision.

What is the wider impact of the decision?

The ECJ ruled that the 1.5% charge on securities issued by HSBC into a French clearance service was an impermissible tax.

As noted, HMRC appear to regard this decision as applying to the issue of shares into a clearance service within the EU.

However, it seems arguable that HMRC’s restricted reading of the decision (and in particular, restricting it in relation to the highlighted terms) is not correct. Other transactions that may therefore benefit from the decision are:

  • The issue or certain transfers of securities to the issuer of Depository Receipts (including ADRs). The case can be read as a prohibition on SDRT and stamp duties on any transaction “forming an integral part of an overall transaction with regard to the raising of capital” whether or not the investors are located within the EU. Accordingly, any imposition of tax or duty on the issue or transfer (where that transfer forms an integral part of an overall transaction with regard to the raising of capital) of securities to the issuer of depository receipts could now be treated as illegitimate, on the basis that such a charge would contravene Article 11 of the Directive. This principle could apply equally in relation to depositary receipts issued outside the EU, notably ADRs11.
  • More generally, on any other transfer of securities to a clearance service or issuer of depositary receipts. There is a possible wider significance to the case. Given the Court's blanket rejection of the "season ticket argument", it could be argued that any 1.5% stamp duty or SDRT charge on any transfer of securities to a clearance service or issuer of depositary receipts might be regarded by the Court as a tax on a mere change in form of securities, which it might view as prohibited by the Directive. For example, a taxpayer might seek repayment from HMRC of SDRT charged on a transfer of securities from Crest to a clearance system without change of beneficial ownership. If the securities were sold, interesting questions might arise as to the level (1% or 1.5%) of the refund.
  • Bearer shares. The 1.5% bearer stamp duty on the issue of certain bearer instruments, including bearer bonds, may also be illegal.

What Next?

Time limits

The time frame for making a claim for refund is unclear and will depend on the final conclusion of a number of cases currently working their way through the Court system (notably Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2008] EWHC 2893. HMRC's appeal against the decision of the High Court in favour of the taxpayers is being heard by the Court of Appeal on 6 October).

Based on the High Court decision in Test Claimants in the FII Group Litigation, a taxpayer seeking repayment of Stamp Duty or SDRT could argue that in practice its claim should not be subject to the statutory time limits for the repayment of the tax, as the right of recovery is based on a common law right with a more generous limitation period. Without doubt, HMRC will argue that any claims should be statute barred at between 2 years and 6 years (depending on the particular tax that is being challenged).


The relevant statutory regimes for repayments of Stamp Duty and SDRT give a right to simple interest on repayments. However, the High Court judgment in Test Claimants in the FII Group Litigation indicated that compound interest should be paid when HMRC is repaying money levied in breach of EU law, and so taxpayers could argue that in this case too they too should be paid compound interest.