PLCs and corporate financiers are absorbing the fallout from a recent case in the European Court of Justice (HSBC Holdings plc, Vidacos Nominees Ltd v The Commissioners of Her Majesty's Revenue & Customs C-569/07). The reaction of HMRC has been to broaden the tax base but HMRC's stance has prompted continuing debate as to the impact of such taxation on the competitiveness of the UK markets.
The law
With limited exceptions Stamp Duty Reserve Tax is charged at 0.5% of the price payable under agreements for the transfer of shares in UK companies. It is common practice in certain non-UK jurisdictions for shares to be transferred in the form of depositary receipts issued by a nominee shareholder or for them to be held and traded within a clearance service. Due to obvious difficulties of enforcement cross-border, arrangements involving the transfer or issue of shares to clearance services or issuers of depositary receipts have been charged at the special rate of 1.5%, with exemption for subsequent dealings in the depositary receipts or within the clearance service. HMRC had characterised this 1.5% entry charge as a "season ticket" for such subsequent dealings.
The case
On 7 June 2000 HSBC made a public offer to acquire all the issued shares in a French publicly traded company, CCF. Shareholders could opt to take shares in HSBC in exchange for their shares in CCF. HSBC obtained a listing of its shares on the Paris Bourse. HSBC also agreed to pay any SDRT arising on the issue of shares traded through the French settlement system. Vidacos was the clearance service through which the settlement system operated. HSBC paid the 1.5% entry charge on the issue of its shares to Vidacos on behalf of sellers of shares in CCF. In short, HSBC claimed that that SDRT entry charge contravened provisions of European Community law (primarily articles 10 and 11 of Council Directive 85/303/EC), which with limited exceptions prohibit national governments from imposing capital duties on the issue of shares.
The ECJ rejected the UK Government's submission that the "season ticket" charge was in effect a charge on the subsequent transfer of securities within the clearance system. To the extent that SDRT was levied on new share issues, it was a capital duty for the purposes of articles 10 and 11. Therefore, as it didn't fall within one of the permitted exceptions, the 1.5% charge on the issue of shares to Vidacos was unlawful.
The response
Clearly companies in a similar position to HSBC can make claims for repayment of SDRT and should consider doing so. Although HMRC insist that repayment claims are time-barred after 6 years, arguably that time limit may not apply. The total value of possible claims has been estimated by some commentators to be in excess of £5 billion.
Naturally, HMRC are keen to maintain their tax take. Although the 1.5% entry charge no longer applies to issues of shares to EU clearance services or depositary receipt systems, it will continue to apply otherwise and legislation will be introduced (and become effective retrospectively) to charge transfers from EU to non-EU services or systems. It should be noted that the differential between jurisdictions coupled with the potential additional cost and complexity may make trading in these ways in UK plc shares less attractive than before. The charge to SDRT has been held to be a disincentive to trading of shares on the UK markets. It remains to be seen whether the imposition of such an additional burden would have a further detrimental effect on the attractiveness of them.
John Toon joined DWF on 1 September 2009 to grow and develop DWF’s Commercial Tax practice. John previously headed Addleshaw Goddard's Leeds based tax team and is recognised as a leading expert in dealing with the tax aspects of real estate related transactions and capital projects. He has extensive experience in the tax aspect of a broad spread of corporate finance and commercial matters.
