Coal Staff Superannuation Scheme Trustees Limited v HMRC

Coal Staff Superannuation Scheme Trustees Limited

The FTT has published its decision in the test case in relation to the recoverability of withholding tax on MODs.


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On 27 June 2016, the First-Tier Tribunal (FTT) published its decision in Coal Staff Superannuation Scheme Trustees Limited (Coal) v HMRC, a test case seeking to recover withholding tax on manufactured overseas dividends (MODs). In broad terms, the First-Tier Tribunal considered whether under EU law (Article 63 – free movement capital), HMRC were permitted to exercise their taxing powers and charge UK withholding tax on MODs when they do not charge any tax or equivalent tax on manufactured dividends in relation to UK shares.

The FTT has decided that Coal’s claim to recover withholding on MODs should not succeed. The main reasons why the FTT ruled in favour of HMRC are as follows:

  • The FTT ruled that the MODs rules did not breach the free movement of capital provision. This was on the basis that the MODs rules did not have a dissuasive factor in the claimant’s decision to purchase overseas shares. This is because had Coal held the shares and received the actual foreign dividend, this may have also suffered WHT and Coal would not be able to receive a credit for this. The FTT considered the MODs rules mirrored this situation;
  • Further what may be regarded as a recognition of the possibility of an appeal, the FTT stated that if there was a breach of the free movement of capital it considered potential justifications for this breach. The FTT firstly accepted HMRC’s attempt to raise a “combined justification” (namely balanced allocation of taxing rights and the prevention of tax avoidance). HMRC’s justification of fiscal cohesion was also accepted. This defence relies upon the need to protect the integrity of a national tax system i.e. the need to ensure tax benefits (i.e. tax repayments) are matched with tax burdens (i.e. tax payments).

We expect permission to appeal to the Upper Tribunal will be requested. In respect to the breach of the free movement of capital we believe the FTT did not consider comparability at the correct level. The FTT compared a MOD with the receipt of an overseas dividend, whereas in actual fact we believe the correct comparison to be a MOD with a UK manufactured dividend. In respect to the justifications HMRC raised and the FTT accepted, we do not believe Court of Justice of the European Union (CJEU) case law supports the use of these justifications in this particular scenario.

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