Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd [2022] UKSC 10

A tax-exempt pension fund trustee claimed repayment of manufactured overseas dividend withholding tax (MOD WHT), arguing the UK tax regime for stock lending of overseas shares restricted free movement of capital contrary to EU law. The Supreme Court held there was no breach of Article 63 TFEU and the remedy claimed was disproportionate.

Facts

The respondent, Coal Staff Superannuation Scheme Trustees Ltd, was the corporate trustee of a tax-exempt pension fund holding substantial UK and overseas shares. Between 2002 and 2008, the Trustee engaged in stock lending through Overseas Shares Lending Agreements (OSLAs). Under the UK tax regime for manufactured overseas dividends (MODs), borrowers were required to deduct MOD withholding tax (MOD WHT) calculated by reference to foreign withholding tax rates before paying MODs to lenders. Tax-exempt lenders like the Trustee received corresponding tax credits but, being exempt from UK income tax, could not utilise these credits.

The Trustee claimed repayment of over £8.8 million, arguing the MOD regime constituted an unlawful restriction on free movement of capital under Article 63 TFEU by treating MODs on overseas shares less favourably than manufactured dividends (MDs) on UK shares.

Issues

Primary Issues

(1) Whether the UK MOD tax arrangements constituted a restriction on free movement of capital contrary to Article 63 TFEU;

(2) If so, whether such restriction could be justified;

(3) What remedy would be appropriate for any infringement.

Judgment

No Breach of Article 63

The Supreme Court (Lords Briggs and Sales delivering the joint judgment, with Lord Reed, Lord Hodge and Lord Hamblen agreeing) allowed the Revenue’s appeal. The Court held the MOD regime did not constitute a restriction on free movement of capital contrary to Article 63.

The Court applied a market economic analysis, distinguishing the lawful disincentive of juridical double taxation from any additional disincentive attributable to UK legislation:

“The scheme for the taxation of manufactured dividends was scrupulous in its endeavour to make the question whether or not to lend tax neutral, both for UK and overseas shares.”

Regarding the lender’s position, the Court found:

“The lender’s sharing of the additional benefits generated by the borrower’s use of the lent shares is to be found not in the MOD but in the lending fee, which is tax-free in the hands of an exempt investor like the Trustee, just as are fees for the lending of UK shares.”

The Court concluded that any suggestion the MOD regime made a contribution to disincentive for acquiring overseas shares was “no more than pure speculation” which “falls well short of the logical inferences which the court may be able to draw under the article 63 jurisprudence.”

Alternative Ground: Remedy

Even if Article 63 had been breached, the Court held the remedy claimed was wholly disproportionate to any breach identified by the Court of Appeal. The San Giorgio principle of tax repayment was applicable only to the extent necessary to restore equal treatment:

“The principle applies to confer a right to a refund which is essential to restore the equal treatment required under article 63 regarding the free movement of capital.”

The Trustee had never sought to quantify or claim the actual economic effect of any dissuasive effect, instead claiming full repayment of credits disproportionate to any identified wrong.

Implications

This judgment clarifies several important principles regarding Article 63 TFEU claims:

(1) Courts must carefully distinguish between the lawful effects of juridical double taxation and any additional disincentive attributable to domestic legislation when assessing alleged restrictions on capital movement;

(2) Economic analysis of dissuasive effect must consider actual market mechanics, including how benefits are distributed between counterparties through different mechanisms (here, lending fees versus MODs);

(3) The extended San Giorgio principle from BTPS requires proportionality between the remedy granted and the breach identified – claimants cannot recover amounts exceeding their actual loss from the specific EU law violation;

(4) Member states have no obligation under Article 63 to correct for juridical double taxation, and remedies should not have the effect of compensating claimants for such taxation.

The decision significantly limits potential claims by tax-exempt investors for repayment of MOD WHT and establishes important boundaries for EU law remedies in tax cases where the breach does not involve direct collection of unlawful taxes by the member state.

Verdict: Appeal allowed. The Supreme Court held that (i) the MOD tax regime did not constitute a restriction on free movement of capital contrary to Article 63 TFEU; and alternatively (ii) even if there had been such a breach, the Trustee’s claim for full repayment of MOD WHT credits must fail as the remedy sought was disproportionate to any wrong suffered and no alternative case for lesser relief had been presented.

Source: Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd [2022] UKSC 10