The special commissioners made a reference to the European Court of Justice (ECJ) for a preliminary ruling in a case in which the taxpayers argued that the charge to stamp duty reserve tax under FA 1986, s. 96 of the contravened art. 10 and 11 of the capital duty directive and art. 43, 49 and 56 EC.

Facts

The taxpayer was a UK incorporated and tax resident company. Prior to its acquisition of Cre'dit Commercial de France (CCF) in July 2000, the taxpayer's share capital was listed on the London, Hong Kong and New York stock exchanges. Following the acquisition, its shares were also listed on the Paris stock exchange. The taxpayer was the holding company of the HSBC group and one of the largest providers of banking and financial services in the world. CCF, which changed its name to HSBC France in 2005, was a public company (soci'et'e anonyme) incorporated and tax resident in France. CCF conducted banking, financing and brokering businesses. Prior to its acquisition by HSBC, CCF's shares were registered with the Paris stock exchange.

Stamp duty reserve tax (SDRT) was introduced to cater for transactions in shares where there was no written instrument of transfer. SDRT was introduced by FA 1986, Pt. IV and by the Stamp Duty Reserve Tax Regulations 1986 (SI 1986/1711). Section 96(1) and (2) of the Act provided for an initial charge at the rate of 1.5 per cent where chargeable securities were transferred into a clearance service. Such a service was typically a system for holding securities and settling transactions in them by book entry. Clearance services were common in continental European jurisdictions. It was common for shares to be in bearer form and that method provided physical security (the bearer certificates being held in a vault) whilst facilitating trading and settlement. There was no SDRT on agreements to transfer securities held within a clearing service. Under s. 97A the operator of a clearance service could elect for transfers within the clearance service to be taxed at the ordinary rate of 0.5 per cent instead of paying the initial charge on the entry of the relevant shares into the clearance service. In connection with its acquisition of CCF, HSBC arranged for its own ordinary shares to become listed on the Paris stock exchange. That additional listing provided prospective accepting CCF shareholders with the ability to effect transactions in the HSBC consideration shares on the Paris stock exchange. CCF shareholders accepting the exchange offer were thereby able to elect to receive HSBC shares in any of three ways: (a) via SICOVAM, the French settlement system for shares traded on the Paris stock exchange; (b) via CREST, the UK settlement system for shares in uncertificated form; and (c) by registration on HSBC's share register in certificated form. In order not to make the offer financially disadvantageous, and therefore unattractive, to French shareholders that wished to opt for option (a), HSBC agreed to pay any SDRT arising on the issue of the shares. Accordingly, the offer document stated that SDRT of 1.5 per cent would be payable on (a) but that HSBC would pay it. The HSBC ordinary shares issued as consideration for the acquisition of CCF were ‘chargeable securities’ within the meaning of s. 99(3) of the 1986 Act. Upon those shares being issued to Vidacos, the UK nominee company used by SICOVAM, s. 96(1) and (2) of the Act provided for SDRT, at the rate of 1.5 per cent of the price or value of the consideration shares, to be payable to the Inland Revenue. The taxpayer paid the relevant SDRT.

In 2002 the taxpayer claimed repayment of the SDRT with interest, on the basis that the charge under s. 96 of the Act to SDRT was incompatible with Community law. The Revenue issued a notice of determination in August 2004 under reg. 6 of the 1986 regulations that a charge to SDRT arose under s. 96 of the Act in consequence of the relevant arrangements; and the taxpayer appealed against that determination.

Issue

Whether the charge to SDRT under s. 96 was contrary to EC law.

Decision

The special commissioner (John Clark) (making a reference to the ECJ) said that the taxpayers had argued that the charge to SDRT contravened art. 10 and 11 of the capital duty directive. In particular, the event giving rise to the charge was the raising or increase of capital and/or the issue of shares and/or the admission of shares to quotation on a stock exchange. Given that the tax thereby fell within art. 10 and/or art. 11, it could not also be a tax within (the mutually exclusive) art. 12 of the capital duty directive and was prohibited; the charge to SDRT violated the fundamental freedoms in art. 43, 49 and 56 of the EC Treaty in that (a) the charge impeded or rendered less attractive the exercise of each of the freedoms and (b) the charge was not justified by the need to prevent purely artificial tax avoidance, fiscal cohesion or on any other legitimate ground; and/or the transaction should have been treated as exempt under FA 1986, s. 97(4) on the grounds that the restriction of that exemption to situations where the target shares were (in effect) UK companies was discriminatory and contrary to art. 12 EC.

The Revenue contended that the charge to SDRT fell within art. 12 of the capital duty directive as a tax on transfer because the 1.5 per cent charge was a ‘season ticket’ charge that was a means of paying in advance and in lieu the SDRT that would otherwise fall due to be paid at 0.5 per cent for each future transfer of the share within the clearance service; and/or the charge was not obligatorily payable since the operator had the opportunity to elect under s. 97A instead to account for the standard 0.5 per cent charge on transfers, provided it met the conditions for such election imposed by the Revenue. Moreover, art. 43, 49 and 56 were not infringed by the charge to SDRT because the operator of clearance services in a member state other than the UK was placed in the same position as an operator in the UK and, as a result, the charge entailed no direct or indirect discrimination on grounds of nationality and did not create an impediment to trade. Finally, s. 97(4) was not discriminatory because it was permissible to afford exemption from charge where an amount had already been paid to cover future transactions but not to afford such exemption where that was not the case; and/or the operator could have avoided the charge had it made a s. 97A election. In the light of the respective contentions, a ruling of the ECJ was appropriate to resolve the matters in dispute between the parties. Accordingly, the ECJ would be asked to make a preliminary ruling whether art. 10 or 11 of Council Directive 69/335, as amended by Council Directive 85/303, or art. 43, 49 or 56 EC or any other provision of EC law prohibited the levying by one member state of a duty on the transfer or issue of shares into a clearance service of 1.5 per cent when:

1. a company (‘A’) established in the first member state offered to acquire the listed and traded shares in a company (‘B’) established in another member state in return for shares in A, to be issued on the stock exchange in the second member state;
2. shareholders in B had the option to receive the new shares in A either: in certificated form, in uncertificated form through a settlement system in the first member state or in uncertificated form through a clearance service in the second member state;
3. the law of the first member state provided, in summary, that:
   1. in the event of the issue of shares in certificated form (or in uncertificated form in the settlement system for dematerialised shares of the first member state), duty was not charged on the issue of the shares but on each subsequent sale of the shares, which duty was charged at the rate of 0.5 per cent of the consideration for the transfer; but
   2. on the transfer or issue of uncertificated shares to the operator of a clearance service, duty was charged (where the shares were issued) at the rate of 1.5 per cent of the issue price or (where the shares were transferred for consideration) at the rate of 1.5 per cent of the amount or value of the consideration or (in any other case) at the rate of 1.5 per cent of the value of the shares and no subsequent charge was thereafter levied on sales of the shares (or of rights to or over the shares) within the clearance service;
   3. the operator of a clearance service might, where it received the approval of the relevant taxation authority, elect that no duty was charged on the transfer or issue of the shares to its clearance service, but that duty was instead charged on each sale of the shares within the clearance service, at the rate of 0.5 per cent of the consideration, and the relevant taxation authority required, as a condition for its approval of such an election, that the operator of the clearance system seeking to make such an election should make and maintain arrangements (as the taxation authority considered satisfactory) for the collection of the duty within the clearance service and for complying or securing compliance with the regulations in relation to it;
4. the arrangements in force at the stock exchange in the second member state required that all shares issued in that jurisdiction must be held in uncertificated form through a single clearance service established in the second member state, the operator of which had not made the election referred to above.

(2007) Sp C 659.

Decision released 19 December 2007.