Introduction

The case of Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd ([2022] UKSC 10) addressed pivotal issues concerning the tax treatment of income derived from stock lending agreements and their compliance with the free movement of capital under EU law. The dispute centered around whether the UK's taxation of manufactured dividends (both domestically sourced dividends (MD) and overseas sourced dividends (MOD)) imposed unlawful restrictions on capital movement as stipulated by Article 63 of the Treaty on the Functioning of the European Union (TFEU).

The parties involved included the UK Revenue and Customs as the appellant, and the Coal Staff Superannuation Scheme Trustees Ltd, a tax-exempt pension fund, as the respondent. The Trustee challenged the UK tax regime, claiming that it discouraged investment in overseas shares due to the imposition of Manufactured Overseas Dividend Withholding Tax (MOD WHT), thereby violating EU provisions on the free movement of capital.

Summary of the Judgment

The Supreme Court examined whether the UK's MOD tax regime constituted a restriction on the free movement of capital under Article 63 TFEU, and if so, whether it could be justified. The core of the appeal questioned whether stock lending arrangements prior to 2014 effectively restricted capital movement by imposing additional tax burdens on tax-exempt investors engaged in stock lending of overseas shares.

Ultimately, the Court found in favor of Revenue and Customs, allowing the appeal. The Court concluded that the MOD tax regime did not infringe upon Article 63 TFEU. The reasoning emphasized that the MOD regime was meticulously designed to neutralize tax incentives without introducing additional disincentives for investors. Furthermore, even in instances where a potential breach of Article 63 was identified, the remedy sought by the Trustee was deemed disproportionate to the alleged infringement.

Analysis

Precedents Cited

The judgment extensively referenced pivotal cases that shaped the interpretation of Article 63 TFEU concerning the free movement of capital:

• Haribo Lakritzen Hans Riegel BetriebsgmbH v Finanzamt Linz ([2011] STC 917) – Established that juridical double taxation is an inevitable aspect of member states' sovereign tax systems and does not inherently breach Article 63.
• Bouanich v Directeur des services fiscaux de la Drôme (Case C-375/12) – Defined restrictions under Article 63 as measures that discourage investment across borders.
• Trustees of the BT Pension Scheme v Revenue and Customs Comrs (Case C-628/15) – Highlighted the necessity of effective remedies for breaches of Article 63.
• Brasserie du Pêcheur SA v Federal Republic of Germany; R v Secretary of State for Transport, Ex p Factortame Ltd (No 4) ([1996] QB 404) – Introduced the "sufficiently serious breach" test for damage claims under EU law.

Legal Reasoning

The Court's legal analysis focused on distinguishing between lawful juridical double taxation and additional restrictions imposed by domestic tax regimes. It underscored that the MOD regime was purposefully structured to replicate the tax-neutral position of non-lending scenarios, thereby ensuring that the act of lending itself did not introduce new tax incentives or disincentives. The Court also delved into economic analysis, assessing whether the MOD regime inherently discouraged investors from engaging in stock lending of overseas shares.

A critical aspect of the reasoning was the "but for" test, which evaluates whether the absence of a specific tax regime would have altered the investment behavior of rational economic actors. The Court found that the MOD WHT did not present a significant additional barrier beyond the existing effects of juridical double taxation, primarily because the MOD WHT was typically offset against available tax credits by the borrowers.

Impact

This judgment has profound implications for the intersection of domestic tax law and EU principles governing the free movement of capital:

• Tax Neutrality in Stock Lending: Reinforces the integrity of tax regimes designed to maintain tax neutrality in stock lending activities, ensuring that such arrangements do not become tools for tax distortion.
• EU Law Compliance: Clarifies the boundaries within which member states can design their tax systems without infringing upon EU principles, providing a framework for evaluating tax policies in similar contexts.
• Remedy Proportionality: Emphasizes the necessity for remedies to correspond proportionately to the nature and extent of any breaches of EU law, thereby influencing future cases involving remedies for EU law infringements.
• Future Litigation: Limits the scope for similar claims challenging tax regimes on the basis of Article 63, thereby reducing potential litigation and providing clarity for taxpayers and tax authorities alike.

Complex Concepts Simplified

Manufactured Dividends (MD and MOD)

Manufactured Dividend (MD): A synthetic form of dividend paid to lenders in stock lending agreements involving UK-based shares. It emulates the dividends that would have been received had the shares not been lent.

Manufactured Overseas Dividend (MOD): Similar to MD, but pertains to shares of companies established outside the UK. MODs are subject to specific tax treatments to mirror the tax implications of actual overseas dividends.

Juridical Double Taxation

Refers to the situation where the same income is taxed by two different jurisdictions, without any manner for the taxpayer to claim relief or credits. In this case, foreign withholding taxes on dividends and UK taxes on those dividends could lead to such double taxation.

Article 63 TFEU

A provision in the Treaty on the Functioning of the European Union that prohibits any restrictions on the free movement of capital between EU member states and between member states and third countries.

San Giorgio Principle

Originating from Amministrazione delle Finanze dello Stato v SpA San Giorgio (Case C-199/82), this principle allows individuals to claim refunds for charges or taxes improperly levied by a member state in breach of EU law.

But For Test

An analytical approach used to determine causation, asking whether the absence of a particular factor (e.g., a tax regime) would have changed the outcome or behavior of the parties involved.

Conclusion