Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd

A national tax measure restricts the free movement of capital under article 63 only if economic analysis shows that it is liable to create an additional disincentive to cross-border investment. Where juridical double taxation already causes a lawful disadvantage, a “but for” comparison must isolate any further disadvantage caused by the domestic measure.

A remedy for breach of directly effective EU rights must correspond to the infringement and be proportionate. The extended San Giorgio principle covers tax credits of which a taxpayer was unduly deprived, but only so far as payment is essential to restore equal treatment. It does not justify repayment of tax imposed on another person, particularly where the state received no payment and the claimant suffered no corresponding loss.

The respondent was trustee of a tax-exempt pension scheme which lent overseas shares under stock-lending agreements. Borrowers paid manufactured overseas dividends after deducting deemed withholding tax calculated by reference to the foreign withholding tax which would have applied to real dividends. The Trustee sought more than £8.8 million representing unusable tax credits.

The First-tier Tribunal, [2016] SFTD 750 (TC), held that the regime did not restrict capital movements. The Upper Tribunal, [2018] STC 1095, and the Court of Appeal, [2019] EWCA Civ 1610; [2020] 1 WLR 777, found an unlawful restriction and awarded full repayment.

The issues were whether the regime created an additional disincentive to acquiring or lending overseas shares contrary to article 63 TFEU and, if so, whether the full value of the credits was an appropriate remedy.

1. The appeal was allowed unanimously. Lord Briggs and Lord Sales gave the joint judgment, with which Lord Reed, Lord Hodge and Lord Hamblen agreed. The manufactured overseas dividend regime did not restrict the free movement of capital contrary to article 63 TFEU.

2. The existence of a dissuasive effect required a market-economic analysis of the likely conduct of rational actors. Because juridical double taxation already lawfully discouraged investment in overseas shares, the correct inquiry was whether, but for the manufactured overseas dividend regime, stock lending would have made such investment sufficiently more advantageous. The regime was tax-neutral as between retaining and lending shares. It caused no disincentive to lend overseas shares once acquired.

3. The Court of Appeal erred in treating the possible loss of a share in a borrower’s dividend-arbitrage benefit as an additional disadvantage. A lender received the net dividend equivalent through the manufactured dividend and its share of the borrower’s profitable opportunities through the lending fee. The regime imposed no structural restriction on that fee. Any suggestion that the borrower’s withholding-tax liability reduced the fee was speculative, particularly since borrowers generally discharged that liability with otherwise unusable credits. Dividend arbitrage also had no equivalent in the domestic comparator involving UK shares.

4. Alternatively, the Trustee’s claim for the full value of the credits failed even if the limited restriction identified by the Court of Appeal were assumed. The extended San Giorgio principle requires payment of unlawfully denied tax credits where payment is essential to restore equal treatment. The remedy must nevertheless be tailored and proportionate to the breach.

5. The manufactured overseas dividend withholding tax was imposed on the borrower, not the lender. The lender had no contractual entitlement to the gross dividend equivalent, the Revenue generally received no payment because borrowers set off credits, and the Trustee was neither impoverished by the tax nor deprived of money received by the Revenue. The only possible relief would have reflected the proved economic value of a lost opportunity to share dividend-arbitrage gains. The Trustee neither pleaded nor proved such loss.

6. The Revenue was refused permission to raise article 64 TFEU for the first time in the Supreme Court. The point had been disavowed below and might have required factual or expert evidence.

1. United Kingdom Supreme Court: Allowed HMRC’s appeal unanimously. It reversed the Court of Appeal’s finding of an article 63 restriction and held alternatively that the remedy claimed was unavailable: [2022] UKSC 10.
2. Court of Appeal: Dismissed HMRC’s appeal. It held that the regime impaired returns to some degree, constituted an unjustified restriction and entitled the Trustee to full repayment: [2019] EWCA Civ 1610; [2020] 1 WLR 777.
3. Upper Tribunal: Allowed the Trustee’s appeal, holding that the whole withholding-tax charge was a restriction and ordering repayment: [2018] STC 1095.
4. First-tier Tribunal: Rejected the claim because the regime merely replicated the effect of juridical double taxation and created no additional restriction: [2016] SFTD 750 (TC).