Coal Staff Superannuation Scheme Trustees Ltd
| Jurisdiction | UK Non-devolved |
| Judgment Date | 27 June 2016 |
| Neutral Citation | [2016] UKFTT 450 (TC) |
| Date | 27 June 2016 |
| Court | First Tier Tribunal (Tax Chamber) |
Judge Jonathan Cannan, Mrs Helen Myerscough
Malcolm Gammie QC and James Rivett instructed by Pinsent Masons LLP appeared for the appellant
Rupert Baldry QC and Oliver Conolly instructed by the General Counsel and Solicitor for HM Revenue & Customs appeared for the respondents
Income tax – Pension fund – Manufactured overseas dividends – Income and Corporation Taxes Act 1988 (ICTA 1988), Sch. 23A – Treaty Establishing the European Community, art. 56 – Whether restriction on the movement of capital – Whether justified – Appeal dismissed.
The First-tier Tribunal has held that the UK tax treatment of manufactured overseas dividends does not breach EU law that seeks to prevent any restriction on the movement of capital.
Coal Staff Superannuation Scheme Trustees Ltd (the appellant)is a corporate trustee responsible for managing the British Coal Staff Superannuation Scheme, a registered UK pension scheme (the fund). The fund had entered into stock lending arrangements involving both UK and overseas shares. The manufactured dividends in respect of UK shares were not charged to UK income or corporation tax, whereas the manufactured overseas dividends (MODs) in respect of the non-UK shares were subject to a UK withholding tax where a withholding tax would have been imposed by the country of origin on actual dividends. As the fund was exempt from tax on its investment income, it could not obtain credit for the withholding tax, and the appellant claimed that the difference in treatment was in breach of the Treaty Establishing the European Community, art. 56 prohibiting restrictions on the movement of capital between member states.
The FTT agreed that the stock-lending transactions involved a movement of capital since, under the terms of the stock lending agreement, there was a transfer of legal and beneficial ownership of the shares to the borrower, but did not consider that the MOD regime amounted to a restriction on the movement of capital. This was because the MOD regime simply ensured that manufactured overseas dividends were treated in the same way as actual overseas dividends. As a general rule, overseas dividends are subject to tax in the jurisdiction in which they are paid and in the jurisdiction in which they are received (juridical double taxation). Juridical double taxation is a matter for the shareholder's state of origin and EU law principles are only applicable if there is some discrimination. Thus the UK is not bound to give relief for the overseas withholding tax (although it does in fact do so, to the extent that there is a UK tax liability against which it may be offset). The FTT also considered that, if the MOD regime did involve a restriction on movement of capital, it fell within the permitted justifications in art. 58 (which allows restrictions on movements of capital in specified circumstances). In this case it could be justified on the grounds of prevention of tax avoidance (a tax exempt lender such as a pension fund could otherwise lend shares to a taxable borrower purely in order to enable the tax credit to be recovered), and on the grounds that it preserved the coherence of the UK tax system (by treating manufactured dividends in the same way as actual dividends).
A number of other pension funds seeking to obtain repayment of withholding tax on manufactured overseas dividends also contributed to the costs of this appeal, which may therefore be regarded as a test case.
[1] The Appellant is a corporate trustee which has responsibility for managing the British Coal Staff Superannuation Scheme (the Fund). It has claimed repayment of withholding tax in connection with stock lending transactions entered into in tax years 2002–03 to 2007–08.
[2] Typical stock lending arrangements involve institutional investors transferring legal and beneficial ownership of shares to a borrower on terms that at the end of the stock loan the shares or an equivalent number of shares will be transferred back to the lender. The borrower as legal and beneficial owner of the shares will be entitled to dividends payable on the shares during the term of the loan. The borrower might have lent the shares onwards or might have sold the shares to another person, in which case it will be the latter person as legal and beneficial owner of the shares who will be entitled to the actual dividends. The contractual terms of a stock lending transaction typically involve an obligation on the borrower to provide the lender with a payment of equivalent value to any dividends paid during the term of the loan. In UK tax law such payments are known as manufactured dividends, and when they relate to dividends derived from overseas shares, as manufactured overseas dividends (or MODs).
[3] By way of summary, in the tax years covered by this appeal the UK imposed no charge to UK income tax or corporation tax on manufactured dividends paid in respect of shares in UK companies. In contrast it imposed a UK withholding tax on MODs where a withholding tax would have been imposed by the country of origin had the MOD been an actual dividend. The UK withholding tax would be recoverable by a UK taxpayer. The legislation we are concerned with was repealed with effect from 1 January 2014.
[4] The Fund is a UK registered pension fund and therefore exempt from tax on its investment income, including dividend income from UK shares held as investments. The same exemption applies to manufactured dividends received by the Fund in respect of UK shares. However in relation to MODs the scheme of the legislation meant that credit for the MOD withholding tax was only available where the recipient had a UK income tax liability for the year of assessment. The Appellant had no such income tax liability and was therefore unable to claim credit for the MOD withholding tax.
[5] In broad terms the question on this appeal is whether EU law permitted the UK to exercise its taxing powers to charge UK withholding tax on MODS when it does not charge any tax or equivalent tax on manufactured dividends in relation to UK shares.
[6] The Fund maintains that the difference in treatment between manufactured dividends in respect of UK shares and MODs was in breach of article 56 of the Treaty Establishing the European Community (now article 63 of the Treaty on the Functioning of the European Union). Those provisions prohibit restrictions on the movement of capital between Member States and between Member States and third countries.
[7] The Respondents contend that the UK legislation did not involve any restriction on the movement of capital. In the alternative, if there was a restriction then it is justified on public interest grounds recognised by the case law of the European Court of Justice and the Court of Justice of the European Union (which together we refer to as the CJEU).
[8] There are a number of other pension funds which have contributed to the cost of this appeal where the Respondents are yet to make a decision on similar claims to repayment of MOD withholding tax. To that extent this appeal is a test case.
[9] There was no dispute between the parties as to the effect of the UK domestic legislation. Nor was there any real issue of fact. We set out below the legislative framework in relation to the taxation of manufactured dividends and MODs, followed by our findings of fact. We then discuss the competing submissions of the parties and the reasoning for our decision.
[10] It is common ground that as a matter of UK domestic tax law the Fund is not entitled to the repayments claimed. On that basis and in the interests of clarity we shall summarise the legislative framework with reference to the relevant statutory provisions but without quoting extensively from those provisions.
[11] The MODs legislation was contained in Schedule 23A Income and Corporation Taxes Act 1988 (ICTA 1988). In some of the later periods covered by the appeal the legislation was re-written, but without any material differences, in the Income Tax Act 2007. The legislation was repealed with effect from 1 January 2014. The parties focussed their submissions mainly by reference to the ICTA 1988 provisions and we shall do the same.
[12] Paragraph 2 Schedule 23A applied wherever under a contract or other arrangements for the transfer of UK shares, one of the parties (a dividend manufacturer) was required to pay an amount to the other party (a manufactured dividend) which was representative of a dividend on the shares.
[13] The basic scheme of paragraph 2 Schedule 23A was to treat the manufactured dividend for all purposes of the UK tax code as being in substance a dividend received from a UK company. Where the dividend manufacturer was a UK resident company, the manufactured dividend was treated as if it were a dividend paid by the dividend manufacturer (paragraph 2(2) Schedule 23A).
[14] The effect of this fiction was that the recipient of a manufactured dividend paid in respect of UK Shares was deemed to receive a dividend from a UK company.
[15] At all material times the UK has exempted registered pension funds, including the Fund, from tax on their investment income, including dividend income from UK shares held as investments (s.186 Finance Act 2004). Accordingly, manufactured dividends received by the Fund in respect of UK Shares were not subject to any charge to UK income tax or deduction of tax at source.
[16] A different regime applied for payments made in respect of dividends on overseas shares (the MOD regime). Paragraph 4 of Schedule 23A applied wherever under a contract or other arrangements for the transfer of overseas securities, one of the parties (an overseas dividend manufacturer) was required to pay an amount to the other party (a MOD) which was representative of a dividend on the overseas shares.
[17] The basic scheme of paragraph 4 Schedule 23A, in particular...
To continue reading
Request your trial
-
The Commissioners for HM Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd
...The First-tier Tribunal (Judge Jonathan Cannan and Mrs Helen Myerscough) had rejected the taxpayer's appeal (published as reference [2016] TC 05203). The Upper Tribunal (Mr Justice Morgan and Judge Roger Berner) overturned the FTT's decision and found for the taxpayer. The aggregate amount ......
-
Coal Staff Superannuation Scheme Trustees Ltd v Revenue and Customs Commissioners
...against the decision of the FTT (Judge Jonathan Cannan and Mrs Helen Myerscough) released on 27 June 2016 (and published as reference [2016] TC 05203) by which the FTT dismissed the Trustee's appeal against the refusal by HMRC of the Trustee's claims for payment of “relevant withholding tax......
-
Coal Staff Superannuation Scheme Trustees Ltd v Revenue and Customs Commissioners
...to expedite the referral because of the UK's forthcoming exit from the EU. SummaryIn Coal Staff Superannuation Scheme Trustees Ltd [2016] TC 05203, the First-tier Tribunal (FTT) held that the UK tax treatment of manufactured overseas dividends (MODs) did not breach EU law that prevents any ......