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UK Tax On Share Issues Ruled Illegal By European Court

by Robin Pilgrim,, London

05 October 2009

The European Court of Justice (ECJ) ruled on October 1 that the UK government’s levying of Stamp Duty Reserve Tax (SDRT) on UK companies raising capital outside the UK is unlawful, leaving the government with a potential refund bill topping GBP5bn (USD7.94bn), it is estimated.

The ECJ agreed with the conclusions of the Advocate-General who recommended in March that the levying of SDRT in such circumstances constituted a breach of European Community law.

The case in question involved British-based HSBC bank, which was contesting the 1.5% SDRT paid on new shares issued in France after it bought French bank CCF in 2000. The ECJ’s decision means that HSBC will get to keep its GBP27m refund, and will be awarded a considerable amount of interest on top of the award.

The ruling has now created opportunities for other taxpayers who bore the 1.5% charge on transactions involving UK equities to recover the tax.

“The sum at stake is substantial,” commented Michael Quinlan, head of stamp taxes at Deloitte, who has been assisting HSBC in the case.

“Our client sought to recover Stamp Duty Reserve Tax levied on capital it raised by issuing shares on the French stock exchange on the grounds that the charge infringed its EU law rights,” he explained, adding: “Now that the ECJ has followed the Advocate General’s recommendations, HSBC will finally receive the SDRT to which it is entitled.”

Quinlan added: “Clearly this ruling has implications for many other businesses.”

The UK investment and banking industry has long called for this somewhat arcane levy to be removed, arguing that it achieves little but encourage a flow of funds offshore.

A report by the Investment Management Association and business advisors KPMG published earlier in the year calculated that the tax loss to the Treasury was GBP720,000 for every GBP1bn of funds domiciled offshore, instead of in the UK. It revealed that UK firms are sponsors of funds totalling approximately GBP400bn in Ireland and Luxembourg, but suggested that if these funds were domiciled in the UK, the government would be receiving nearly GBP300m in additional tax revenue per annum from the industry.

UK funds have to pay Schedule 19 SDRT, which is in addition to the SDRT charged on purchases of UK shares by funds. It is therefore an additional cost to investors, and, the funds industry contends, makes UK funds less marketable than their European counterparts.

However, there is little chance that the UK government, in its present fiscal predicament, will surrender this stream of tax revenue without a fight, as indicated by the Treasury’s response to the judgment.

“The government's policy position remains that transactions involving UK shares should bear their fair share of tax,” a statement issued by HM Revenue and Customs revealed.

“In light of today's judgment, we will determine whether and how to amend the Stamp Duty Reserve Tax rules to ensure movements of shares into and within clearance services bear their fair share of tax, whilst ensuring the rules are compatible with Community law,” the statement added.

However, the tax department confirmed that it will not seek to apply SDRT on the issue of shares into a clearance service within the European Union to which a 1.5% charge would have previously applied “with immediate effect.”

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