Taxpayer on the hook for £5bn as ECJ says share tax is unlawful

HSBC wins landmark judgment over tax refund

The British taxpayer is facing a bill that could total £5bn after the European Court of Justice ruled yesterday that Britain has been levying illegal stamp duty charges on cross-border transactions. The judgment paves the way for British companies to reclaim charges they have paid on mergers and acquisitions in the European Union.

Tax experts yesterday urged companies that have placed shares into foreign clearing systems in order to facilitate takeovers or mergers in the EU to claim back stamp duty reserve tax (SDRT), which has been imposed unlawfully for 23 years.

They also suggested that a similar system in the US, known as the depositary receipt arrangement, where HM Revenue & Customs also imposes the 1.5 per cent tax, could also be found to be unlawful.

The Luxembourg court ruled yesterday that HSBC, the banking group, could claim back £27m it paid in SDRT to place stock into a French clearing system for its all-share acquisition of the French bank CCF in 2000.

The SDRT formed part of the 1986 Finance Act, which allowed the Treasury to cash in on deals made in the European Union. But the ECJ said the law contravened the earlier Capital Duty Directive, a European provision passed in 1969 before the United Kingdom joined the Common Market in 1973.

Peter Cussons, head of PricewaterhouseCoopers' EU corporate tax division, said the ruling could immediately lead to at least £1bn worth of claims against the taxpayer. "This will undoubtedly be a blow to HM Treasury by virtue of the expected value of potential reclaims," he said. "This is indicative of a store of UK legislative tax issues that are unlawful under EU law. One by one these are floating to the surface."

Mr Cussons added that if the judgment was applied to similar mechanisms in other parts of the world such as the United States, the liability of the Treasury could reach £5bn.

HMRC moved quickly to scotch initial reports that the Government had decided to scrap the provision, but a spokesman for the tax service did say that it "will not seek to apply a 1.5 per cent SDRT on the issue of shares into a clearance service within the European Union."

HMRC also dismissed suggestions that the ruling could cost the Treasury billions of pounds. "The ECJ judgment today only covers the 1.5 per cent charge on issues into clearance services in Europe – this is a tiny proportion of the overall yield, and is generally only tens of millions a year."

Others disagreed. "It is difficult to see that the judgment is limited to shares issued through EU clearance services," said Ashley Greenbank, a tax partner at the law firm Macfarlanes. "In principle it applies equally to prohibit the 1.5 per cent charges which apply on the issue of shares by UK companies to all clearance services or into depositary receipt arrangements. If so, the judgment is potentially a huge headache for the Government as it would extend to duties on capital raised by UK companies and banks in the US and other markets for many years."