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Coal Staff Superannuation Scheme Trustees Limited v HMRC – UT decision

Coal Staff Superannuation Scheme Trustees Limited v..

The UT has overturned the FTT in the test case ruling in favour of the test claimant in relation to the recoverability of withholding tax suffered on MODs.

Stefano Borsi


KPMG in the UK


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On 16 May 2018, the Upper Tribunal (UT) published its decision in Coal Staff Superannuation Scheme Trustees Limited (the Trustee) v HMRC, a test case seeking to recover withholding tax suffered on manufactured overseas dividends (MODs), following an appeal from the First-tier Tribunal (FTT). The UT reconsidered whether the UK tax treatment of MODs was compatible with EU law (in particular Article 63 TFEU regarding the free movement of capital), given that the UK tax treatment did not charge any tax or equivalent tax on manufactured dividends in relation to UK shares. In June 2016, the FTT had decided that the Trustee’s claim to recover the UK withholding tax on MODs should not succeed. The UT concluded that the FTT in its initial decision had erred in law and that the Trustee’s claim to recover withholding tax on MODs should succeed, thereby overturning the previous decision from the FTT.

A number of the key highlights from the decision are as follows:

  • The UT decided the UK tax treatment of MODs constituted a breach of the free movement of capital. In doing so the UT noted that in its view the correct comparison to be made was between the UK tax treatment of UK manufactured dividends and the UK tax treatment of MODs. The FTT had previously compared the UK tax treatment of a MOD with the taxation of an actual overseas dividend received by the Trustees;
  • The UT found that the tax position of the ‘borrower’ party in a stock lending transaction should have no bearing on the conclusion as to whether the claimant was subject to a discriminatory tax treatment;
  • Further potential justifications for a breach of the free movement of capital, relating to the concepts of the balanced allocation of taxing rights and the prevention of tax avoidance, and fiscal cohesion of the UK tax system, which had previously been accepted by the FTT, were also rejected by the UT;
  • In terms of remedy, the UT was not, however, convinced that a complete disapplication of the relevant provision was required, and that instead a conforming interpretation could be applied in more limited circumstances - specifically where the recipient of a MOD has no liability to income tax under s186 FA 2004 (as a registered pension scheme); and
  • The UT also noted that, having considered the extensive relevant EU case law, it had reached its conclusion with ‘complete confidence’ and therefore a reference to the Court of Justice of the European Union was not considered necessary.

Whilst the judgment is clearly positive news for the test claimant and other registered pension schemes, it remains to be seen whether HMRC will seek to appeal this decision to the Court of Appeal.

The position for other claimant types which are not registered pension schemes, including life insurance companies and investment funds, is potentially muddied somewhat by the narrow conforming interpretation proposed by the UT. However, where such claimants have not been able to obtain relief by way of credit for the relevant withholding tax, it would appear that the rest of the judgment strongly supports their entitlement to a reclaim.

Note that following legislative changes, with effect from 1 January 2014, there is no longer any UK withholding tax on MOD payments. Therefore claims relate to periods prior to this date and there is no opportunity to file reclaims in relation to MODs received after 1 January 2014.

For further information please contact:

Stefano Borsi

Gohar Khan

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