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Coal Staff Superannuation Scheme – Taxation of manufactured overseas dividends breached EU law

27 November 2019

In HMRC v Coal Staff Superannuation Scheme Trustees Ltd [2019] EWCA Civ 1610, the Court of Appeal dismissed HMRC's appeal and held that the imposition of withholding tax on manufactured overseas dividends was contrary to EU law.


Coal Staff Superannuation Scheme Trustees Ltd (the Trustee) is the trustee of the British Coal Staff Superannuation Scheme (the Fund), which is a registered pension scheme.

The Fund participated in stock lending transactions, which involve the owner of shares (the lender) transferring the shares to another party (the borrower) on the basis that the borrower will return either the same shares or equivalent shares. Title to the shares passes to the borrower, who may retain the shares, lend them on or sell them. The borrower typically agrees to pay the lender a sum equivalent to any dividend that may be paid, during the term of the loan, to the person who holds the shares at that time. Tax legislation terms these payments "manufactured dividends" (MDs) when they relate to shares in companies resident in the United Kingdom and "manufactured overseas dividends" (MODs) in the case of overseas companies.

Under Schedule 23A, Income and Corporation Taxes Act 1988 (ICTA), a UK borrower was required to deduct from a MOD payment a sum equal to the amount of overseas tax that would have been deducted from the overseas dividend that the MOD represented. This deduction was made on account of income tax.

However, from the point of view of the lender, the deduction was to be treated as an amount withheld on account of overseas tax. This meant that under section 796, ICTA, a lender could only set deducted tax off against other tax due from him, and a tax exempt lender, such as the Fund, was therefore unable to recover any tax deducted from the MODs. If the deducted tax had instead been treated as withheld on account of income tax, a tax exempt lender would have been entitled to claim repayment from HMRC.

Unlike MODs, MDs were not subject to UK withholding tax. The Trustee therefore argued that the MOD regime infringed EU law relating to the freedom of movement of capital. The Trustee claimed repayment of sums totalling almost £9 million in respect of tax deducted from MODs which it received in the tax years 2002/03 to 2007/08.

The First-tier Tribunal dismissed the Trustee's appeal. The Trustee was successful in its appeal before the Upper Tribunal (UT). HMRC appealed to the Court of Appeal.

Court of Appeal judgment

The appeal was dismissed.

The Court of Appeal agreed with the UT and held that the MOD regime constituted an unjustified restriction on the free movement of capital, contrary to EU law.

As to an appropriate remedy, the Court adopted a conforming interpretation of the relevant statutory provisions. In the view of the Court, paragraph 4(4), Schedule 23A, ICTA, could be construed as not applying in the case of a recipient of a MOD which, by virtue of section 186, Finance Act 2004, has no liability to income tax, to the extent to which the recipient is, by virtue of section 796, ICTA, not entitled to credit for the relevant withholding tax. The Trustee was therefore entitled to be repaid the income tax equal to the withholding tax deducted from the gross amount of the MODs.


Although the MOD provisions in Schedule 23A, ICTA, were abolished with effect from 1 January 2014, the Court of Appeal noted that this was a test case as similar claims had been made by other pension funds, life insurance companies, investment funds and charities. In addition, the Court's approach to examining the relevant EU tests on free movement of capital may be of wider interest to other taxpayers.

The judgment can be viewed here.


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