Supreme Court judgment in HMRC v Coal Staff Superannuation Scheme Trustees Ltd

The Supreme Court has found in favour of HMRC in a test case on the recoverability of withholding tax suffered on manufactured overseas dividends.

The Supreme Court has found in favour of HMRC in a test case on the recoverability

The Supreme Court (UKSC) has handed down judgment in a test case relating to the free movement of capital in relation to withholding tax (WHT) on manufactured overseas dividends (MODs). The Respondent was unsuccessful in its argument that the UK tax treatment of MODs constituted a restriction on the free movement of capital under Article 63 of the Treaty on the Functioning of the European Union (TFEU). Consideration of justification or appropriate remedy was not required in light of that finding but the UKSC did take the opportunity to discuss remedy and this may provide guidance for similar matters. Commentary on the quantum of claims (being over £600 million) by the affected claimant group as a whole was given by the UKSC during hand down and in the judgment itself. As a result of this judgment, sums in respect of WHT will not be repayable under the relevant statutory claims.

HMRC appealed to the UKSC in relation to claims for repayment of WHT to a pension fund trustee. HMRC’s appeal succeeded, and the judgment was unanimous. The issues were as follows: (i) whether the UK tax treatment of MODs constituted a restriction of the free movement of capital; (ii) if so, whether this restriction was justified under EU law; and (iii) what the appropriate remedy would be.

The UKSC held that there was no restriction under Article 63. The finding on that issue alone determined the case in HMRC’s favour. However, the UKSC went on to consider in some detail the potential remedy in the alternative, if they were to assume both that a restriction did in fact exist and that there was no relevant justification.

Interestingly, the UKSC seems to have taken a different approach on restriction to that in other EU law cases and, to the courts below. In essence, they have undertaken an evidential exercise, to ascertain if the MOD regime was, in practice, dissuasive to overseas investment. In this approach they note that juridical double taxation is already a dissuasive factor affecting the acquisition of overseas shares, by comparison with UK shares, and that their analysis proceeds against the background of juridical double taxation as a ’fact of life’. The UKSC did not remit the case to the First-tier Tribunal (FTT) for further factual consideration on evidential gaps identified.

A number of UK pension funds have prospectively secured repayment of WHT from European overseas tax authorities in reliance on a breach of the free movement of capital and therefore received overseas dividends gross (following the Fokus Bank line of cases). This relied on a traditional comparator analysis which distinguished between the difference in tax treatment for dividends paid overseas versus domestically. The UKSC did not comment on this.

The judgment refers to WHT being suffered by the Authorised UK Intermediaries (as borrower under the stock lending agreements), despite the fact that WHT is generally paid on account of sums prior to onward distribution, whilst the tax withheld remains that of the recipient. This appears to be novel analysis. In respect of the potential remedy, if the UKSC was wrong (i.e. the ‘alternative’ position) and there had been a breach of EU law, the Court considered the Respondent’s claims to fail in the alternative as the remedy sought did not match the breach.

No reference to the CJEU was made, despite several applications by the respondents during the course of proceedings and the UKSC considering that on certain findings there was no EU jurisprudence on the matter. It may be of interest to a wider audience to note the UKSC’s comments at paragraph 28 of the judgment in relation to the impact of EU law findings on UK tax law.