Revenue And Customs v Coal Staff Superannuation Scheme Trustees Ltd

A domestic tax regime is a restriction on the free movement of capital if it is liable to discourage investment or participation in comparable cross-border transactions. A regime which makes stock lending involving overseas shares less favourable than stock lending involving UK shares may therefore infringe Article 63 of the Treaty on the Functioning of the European Union.

Juridical double taxation and the preservation of fiscal cohesion do not justify a domestic deduction imposed regardless of whether corresponding foreign withholding tax was levied. Any anti-avoidance measure must be proportionate and allow commercial justification to be demonstrated.

Where possible, incompatible legislation must be construed compatibly with EU law. Paragraph 4(4) of Schedule 23A was therefore read subject to an exception for tax-exempt recipients unable to use the relevant tax credit.

The respondent trustee administered a registered pension scheme exempt from tax on investment income. It had received manufactured overseas dividends under stock lending arrangements involving overseas shares. Tax was deducted under paragraph 4 of Schedule 23A to the Income and Corporation Taxes Act 1988.

The First-tier Tribunal dismissed the trustee’s appeal. The Upper Tribunal allowed it, holding that the regime restricted the free movement of capital, that the restriction was unjustified, and that a conforming interpretation could provide a remedy: [2018] UKUT 0152 (TCC). HMRC appealed.

The issues were whether the regime constituted a restriction, whether any restriction was justified, and whether the legislation should be interpreted or disapplied to provide relief.

Appeal dismissed. The Court held that the manufactured overseas dividends regime restricted the free movement of capital under Article 63 of the Treaty on the Functioning of the European Union.

1. The relevant comparison was between the UK tax treatment of manufactured dividends relating to UK shares and manufactured overseas dividends relating to overseas shares. The latter regime could impair returns from stock lending and discourage investors from buying or retaining overseas shares. The fact that an investor would also suffer foreign withholding tax on an actual overseas dividend was not determinative.
2. Juridical double taxation may result from the parallel exercise of taxing powers by different states without infringing EU law. That principle could not justify this regime because the UK deduction applied whether or not the actual dividend had been subject to equivalent foreign withholding tax. The deduction was a separate domestic matter.
3. The recognised justification test required a legitimate Treaty-compatible objective supported by imperative reasons in the public interest, an appropriate measure, and one that went no further than necessary. The regime was not directed at preserving the balanced allocation of taxing powers or at wholly artificial tax-avoidance arrangements. Even if such an objective were available, the regime was disproportionate. It provided no opportunity to demonstrate commercial justification and did not confine the charge to any artificial excess.
4. Fiscal cohesion required a direct link between a tax advantage and the corresponding tax levy, assessed by reference to the objective of the legislation. The manufactured overseas dividends regime was distinct from the regime for actual overseas dividends. Allowing a tax-exempt recipient to recover the unlawful deduction did not undermine its cohesion.
5. Domestic legislation incompatible with EU law must, so far as possible, be interpreted compatibly, provided the interpretation remained consistent with the legislation’s underlying thrust. Paragraph 4(4) of Schedule 23A was properly read as subject to an exception where the recipient was exempt under section 186 of the Finance Act 2004 and unable to obtain credit under section 796 of the Income and Corporation Taxes Act 1988. The resulting remedy was repayment of the deducted tax.

1. Court of Appeal (Civil Division): dismissed HMRC’s appeal.
2. Upper Tribunal (Tax and Chancery Chamber): allowed the trustee’s appeal and adopted a conforming interpretation of paragraph 4(4) of Schedule 23A: [2018] UKUT 0152 (TCC).
3. First-tier Tribunal: dismissed the trustee’s appeal.