Stamp Duty Reserve Tax: The implications of HSBC Holdings plc and Vidacos Nominees v HMRC - Mazars - United Kingdom
Stamp Duty Reserve Tax: The implications of HSBC Holdings plc and Vidacos Nominees v HMRC
This article examines the repercussions and opportunities of the ECJ case for issuers of share capital on the occasion of secondary listings and for institutional investors who bought/are buying shares issued on the occasion of those listings.
The ECJ Judgement
On 1 October 2009, the European Court of Justice ruled in favour of HSBC in their attempt to recover the 1.5% SDRT suffered as an entry charge on the shares issued to Vidacos, a clearance service nominee, under s96 Finance Act 1986. Details of the main argument in the case can be found in our article entitled ‘Demise of the 1.5% “Entry Charge”? The HSBC case in the ECJ’.
By way of an update, the decision in the case was based on Article 11 of Council Directive 69/335/EEC concerning indirect taxes on the raising of capital (‘the Capital Duty Directive”) which provides that no tax should be imposed on the issue of shares or securities by a company.
The ruling was therefore that the levying of a duty, such as the charge to SDRT, on the issue of shares into a Community clearance service is prohibited. Despite the opinion given by the Advocate General, there was no ruling on Article 56 of the Treaty, prohibiting restrictions on the freedom of movement of capital. This means that only SDRT on issues has been ruled to be in breach, but not SDRT on transfers.
This said, however, the ECJ followed the AG's opinion and Commission v Belgium that the initial acquisition of a newly issued security is part of the same transaction as the issue of that security. This means that if the issuing company offers subscribers a choice between receiving certificated securities (no SDRT because this is a direct issue) or receiving securities through a clearance service, which requires transfer of the newly issued securities to the clearance service operator or deposit-taker, the latter position is no different and should be treated as an issue, protected by the Capital Duty Directive, and not excluded as a separate transfer.
HMRC’s reaction to the case
HMRC’s reaction to the case was as follows:-
1. On 2 October 2009 it issued a notice that is was considering the judgement in detail in conjunction with HM Treasury but that with immediate effect it would no longer need to apply a 1.5% SDRT charge on the issue of shares into a clearance service within the EU and that in consequence it would remove the exemptions for the movement of securities issued as from that date between different clearance services and/or depositary receipt issuers. The stated intention is to prevent the shares from being routed through a European clearance service and subsequently transferred to a depositary receipt system or clearance service outside the EU.
2. In the November PBR, it was announced that the legislation would be introduced in the Finance Bill 2010 and that it would be narrower in scope than indicated in the announcement of 2 October, as it is more in the nature of an anti-avoidance measure to prevent a scheme, arranged between an issuing company and a depositary receipt issuer or clearance service, issuing new shares without a 1.5% stamp charge being paid and their subsequent transfer to a non-EU depositary receipt system or clearance service i.e. not all transfers between clearance services/depositary receipt issuers will be lost.
3. On 18 January 2010, HMRC issued a notice inviting statutory claims for repayment with interest from tax payers who have paid SDRT on the issue of shares on a company resident in the United Kingdom to a depositary receipt issuer or a clearance service located within the European Union. The notice indicates that it will only accept repayment claims made within six years of the later of the date on which the payment of SDRT was made or the relevant account date for payment of the SDRT. The claim must contain a declaration that the SDRT has been paid on issue. The notice can be found here and lists all the information required for the claim.
Is this all the HSBC case means? The limits of what HMRC has recognised:
The diagram below shows the various instances under which a UK company could have issued shares in a way that triggers the 1.5% entry charge.
1. HMRC’s response is specifically aimed at the issuance of new shares into Europe and therefore has only agreed not to charge it when shares are issued into an EU clearance service or to an issuer of European Depositary Receipts (“EDRs”).
2. This may not make a major difference for clearance services going forward as many of these have made a s97A Finance Act 1986 election to pay 0.5% SDRT on transfers within the clearance services in return for not paying the entry charge.
3. However the text of Article 11 of the Directive does not specify that the issue of shares to a market outside Europe is excluded from this protection, and therefore Amercian Depositary Receipts (“ADRs”) should also be covered by the exemption. On the basis that HMRC is preparing to introduce anti-avoidance rules to prevent EU clearance services or EDR issuers from being used to target the non-EU market, it is clearly not of the same opinion and is not inviting claims in respect of ADRs as part of the new reclaims process.
4. In the light of the HSBC case, Article 11 may also be read as prohibiting the 1.5% charge in the issuance of bearer shares and warrants, but again HMRC is silent on the matters.
Opportunity to reclaim
The HMRC notice gives the opportunity to reclaim to companies which undertook to pay the SDRT on secondary listings of their shares with the assistance of clearance service providers in the EU.
This said, investment funds, life funds and pension funds with equity portfolios may also be entitled to reclaim the SDRT charge that was included in the various acquisition costs of shares acquired in secondary listings.
It is recommended that managers of funds which have acquired high volumes of equity through secondary listings (including underwriting funds) review their portfolios to assess whether the amounts are sufficiently material to consider this avenue.
The case and its impact may also be of particular interest to underwriters of UK company share issues outside the UK if the acquisition was via a clearance service or depositary receipt issue.
If SDRT suffered in respect of ADRs or bearer instruments was sufficiently material, it may be worthwhile to make it the subject of a separate claim. Although this is likely to be challenged by HMRC at this stage, there may be a case for separate litigation on the subject and therefore protective claims may be in point.
If you would like further details on how to make a claim in respect of any of the transactions described in this article please contact Carine Beidas on 0207 063 4311, or e-mail carine.beidas@mazars.co.uk.
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