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Cite as: [2007] UKSPC SPC00659, [2007] UKSPC SPC659

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HSBC Holdings Plc & Ors v Revenue & Customs [2007] UKSPC SPC00659 (19/12/2007)

Spc00659

THE SPECIAL COMMISSIONERS

(1) HSBC HOLDINGS PLC

(2) VIDACOS NOMINEES LIMITED Appellant

- and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondent

Special Commissioner: JOHN CLARK

DIRECTIONS

UPON hearing Counsel for the Appellants and Counsel for the Respondents

AND UPON finding that it is necessary to enable the Special Commissioner to give judgment in this case to resolve questions concerning the interpretation of Articles 10, 11 and 12 of Council Directive 69/335 as amended by Council Directive 85/303/EEC of 10 June 1985 (OJ 1985 L 156 p.23) and Articles 12, 43, 49 and 56 of the Treaty establishing the European Community ("the EC Treaty") and that it is appropriate to request the Court of Justice of the European Communities ("the European Court") to give a preliminary ruling thereon

IT IS ORDERED that:

(1) The questions set out in the First Schedule to this Order concerning the interpretation of Articles 10, 11 and 12 of Council Directive 69/335 as amended by Council Directive 85/303/EEC of 10 June 1985 (OJ 1985 L 156 p.23) and Articles 12, 43, 49 and 56 of the EC Treaty be referred to the the European Court for a preliminary ruling in accordance with Article 234 of the EC Treaty.

(2) The Clerk forthwith transmit to the Registrar of the European Court of Justice:

a. this Order

b. the other documents listed in the Second Schedule to this Order

(3) All further proceedings in this appeal be stayed until the European Court has given its preliminary ruling on the questions referred to it or until further order.

JOHN CLARK

SPECIAL COMMISSIONER

FIRST SCHEDULE

REQUEST FOR A PRELIMINARY RULING OF

THE COURT OF JUSTICE OF THE EUROPEAN COMMUNITIES

1. THE REFERRING TRIBUNAL

The referring tribunal is the Special Commissioners. The Special Commissioners was established by section 4 of the Taxes Management Act 1970 for the special purposes of the Income Tax Acts. The Special Commissioners hear and determine appeals concerning decisions of the HM Revenue and Customs relating to all direct taxes. The jurisdiction of the Special Commissioners extends to the whole of the United Kingdom.

2. THE FACTS AND BACKGROUND

The following Agreed Statement of Facts (paragraphs 3.1-3.45 of this order) sets out the salient facts agreed by the parties which may be assumed for the purposes of the reference.

3. AGREED STATEMENT OF FACTS

Introduction

4. 1 This dispute concerns whether Article 10 or Article 11 of Council Directive 69/335, as amended by Council Directive 85/303/EEC of 10 June 1985 (OJ 1985 L 156, p. 23), or Article 43, Article 49 or Article 56 of the EC Treaty or any other provision or principle of European Community law prohibit the levying by the United Kingdom, in the circumstances described below, of a duty of 1.5% on the issue of shares into a clearance service.

The parties to the arrangements

5. 2 HSBC Holdings plc ("HSBC") is a UK incorporated and tax resident company. HSBC was incorporated on 1 January 1959 and re-registered as a public limited company on 24 December 1990. HSBC's registered office is at 8 Canada Square, London, E14 5HQ, England. Prior to the acquisition of Crédit Commercial de France ("CCF") in July 2000, HSBC's share capital was listed on the London, Hong Kong and New York stock exchanges. Since the acquisition, its share capital has also been listed in France (see paragraphs 30 and 35 below) and Bermuda. HSBC is the holding company of the HSBC Group and is regulated by the UK Financial Services Authority. The HSBC Group is one of the largest providers of banking and financial services in the world. CCF changed its name to HSBC France in 2005.
6. 3 CCF is a public company (a société anonyme) incorporated and tax resident in France. CCF was formed in 1894 and will expire on 30 June 2043, unless wound up or renewed. CCF's registered office is at 103, avenue des Champs- Elysees, Paris (75419), France. CCF conducts banking, financing and brokering businesses. Prior to the acquisition of CCF by HSBC, CCF's shares were all registered with the Premier Marché à Règlement Mensuel of ParisBourseSBF SA ("the Paris Stock Exchange"), and were also traded on the London SEAQ (the London Stock Exchange's service for mid-cap Official List securities).
7. 4 Prior to its acquisition by HSBC, CCF had an issued share capital of €369,344,290 (made up of 73,868,858 shares with a nominal value of €5 each).
8. 5 Vidacos Nominees Limited ("Vidacos") is the UK nominee company used by SICOVAM, the French clearance service for the Paris Stock Exchange (described below).

The national law

Capital Duty

9. 6 By sections 141 and 148 of and Schedule 14 to the Finance Act 1988, the United Kingdom abolished duty on the creation of capital by companies incorporated in the United Kingdom as previously enacted by the Finance Act 1973. Such duty had previously been charged at 1% on, inter alia, any increase of the issued capital of a limited company by reason of the acquisition of the whole or part of the issued capital of another company. Subject to limited exceptions, stamp duty is not charged on the creation of capital by companies in the United Kingdom.

Stamp Duty and Stamp Duty Reserve Tax ("SDRT")

10. 7 Stamp duty is a tax payable on certain documents which effect the transfer on sale of certain types of property, such as shares. The transfer on sale of shares by means of a written instrument is subject to stamp duty, chargeable at the rate of 0.5% of the consideration given for the transfer. Until 1986, company law generally required a paper transfer document for the registration of a transfer of ownership of shares in UK companies. All such documents effecting a transfer on sale would have to be stamped^[1].
11. 8 Since 1986, in cases where the sale of shares is not to be effected by means of a written instrument, an alternative method of charging tax has been imposed. Stamp Duty Reserve Tax was introduced to cater for transactions in shares where there was no written instrument of transfer^[2].
12. 9 SDRT was introduced by Part IV of the Finance Act 1986 ("the Act") and by supporting Regulations in Statutory Instrument SI 1986/1711 ("the 1986 Regulations"). SDRT operates, in summary and in so far as relevant for present purposes, in the following manner.

(a) By virtue of section 87(1) of the Act, agreements for the transfer of shares and other chargeable securities for a consideration in money or money's worth are subject to an SDRT charge at the rate of 0.5% of the amount or value of the consideration for the transfer. This charge is not payable where the transfer between the two parties is effected by means of a stock transfer form which is duly stamped (section 92 of the Act).

(b) Section 87(1) applies only to agreements to transfer "chargeable securities". "Chargeable securities" are defined by section 99 to mean shares issued by UK companies or shares in foreign companies where these are registered in a UK register (or 'paired' with shares issued by UK companies), together with certain other rights in and over such shares. Section 86(4) of the Act states that the charge applies wherever the transaction is carried out and irrespective of the residence of the parties.

(c) Section 96(1) and (2) of the Act provides:

(1) Subject to … sections 97 and 97A below, there shall be a charge to stamp duty reserve tax under this section where-

(a) a person (A) whose business is or includes the provision of clearance services for the purchase and sale of chargeable securities has entered into an arrangement to provide such clearance services for another person, and

(b) in pursuance of the arrangement, chargeable securities are transferred or issued to A or to a person whose business is or includes holding chargeable securities as nominee for A.

(2) …tax under this section shall be charged at the rate of 1.5% of the following:

(a) in a case where the securities are issued, their price when issued;

(b) in a case where the securities are transferred for consideration in money or money's worth, the amount or value of the consideration;

(c) in any other case, the value of the securities."

(d) The term "clearance service" is not defined by legislation, but the expression is generally understood to refer to a system for holding securities and settling transactions by book entry. As described in the Inland Revenue Stamp Taxes Manual:

"14.10 Typically, a clearance service is a system for holding securities and settling transactions in them by book entry. The securities may be held indefinitely within the system, despite changes in beneficial ownership and are held either by the company operating the clearance system or by its nominee, and are thus traded without the use of transfer documents.

11 Clearance services are common in continental European jurisdictions. It is common for shares to be in bearer form and this method provides physical security (the bearer certificates being held in a vault) whilst facilitating trading and settlement.

12 There is no SDRT on agreements to transfer securities held within a clearing service."

(e) After the initial charge, section 90(5) of the Act exempts transfers within the clearance service from the ordinary charge under section 87.

(f) Section 97A provides that the operator of a clearance service may, with the approval of the Inland Revenue, elect that stamp duty and SDRT shall instead be charged pursuant to that section. An election under section 97A comes into force on the date notified to the operator of the clearance service by the Inland Revenue in giving approval. During the period that the election is in force, stamp duty and SDRT are chargeable, in connection with the clearance services to which the election relates, (for example, on a transfer or issue under section 96(1)) as they would have been chargeable apart from section 96. Accordingly, where such an election is made and approved, transfers within the clearance service are taxed at the ordinary rate of 0.5% and no charge is imposed on the entry of the relevant shares into the clearance service.

(g) Section 97(4) (as amended) exempts from the charge under section 96 the issue of shares in exchange for other shares that are held within a 'clearance services scheme', where the issuer either has control of the other company or will do so in consequence of the offer under which the exchange is made. The effect of section 97(6) is that this applies only if the other shares are themselves chargeable securities.

The conditions for election under section 97A

13. 10 Pursuant to section 97A(6), HMRC require an operator of a clearance service who wishes to make a section 97A election (see paragraph 9(f) above) to make and maintain arrangements satisfactory to the Commissioners for the collection of SDRT chargeable in accordance with section 97A and for complying, or securing compliance with, the SDRT legislation. By June/July 2000 (the time of the arrangements described below) the Stamp Office of the Inland Revenue had issued a Guidance Note dated February 1998 and the Inland Revenue Stamp Taxes Manual (2000 edn.^[3]) in which the Inland Revenue (now HMRC) provided detailed guidance in relation to the nature of the arrangements it required for any proposed election under section 97A by a clearance service. The relevant text from those documents containing that guidance is contained in Appendix 1 to this Agreed Statement of Facts.
14. 11 Where the operator is not resident in the United Kingdom and has no branch or agency in the United Kingdom, HMRC may require him, as a condition of such approval of his election, to appoint a "tax representative" who should have a business establishment in the United Kingdom and be approved by the Commissioners (section 97A(7)-(8)).  Such a representative is entitled to act on the operator's behalf and is obliged to secure the operator's compliance with and discharge of the obligations and liabilities to which the operator is subject in connection with the clearance service(s) to which the operator's election relates.  The tax representative is personally (and jointly and severally) liable in respect of any failure to secure the operator's compliance with, or discharge of, any such obligation or liability (section 97A(9)). As an alternative to the appointment of a tax representative, whose exposure would be unlimited, HMRC have been willing in certain cases to exercise their discretion to accept a capped guarantee from a suitable financial institution on behalf of the operator.  A section 97A election may be terminated by the Commissioners on not less than 30 days' notice to the operator if there has been a breach of a condition of approval of the election (section 97A(10)).   In the event of the termination of approval, SDRT is charged at 1.5% on the value of all chargeable securities held by the clearance service operator or its nominee to which the section 97A procedure had, prior to termination, related (section 97A(11)). 
15. 12 HMRC consider that a clearance service operator is entitled to decide whether it wants its section 97A election to cover all the UK chargeable securities for which it provides clearance services or only a particular sub-set of those securities. The operator may wish the election to cover all the securities held within its system or alternatively only the shares, or a specified class of shares, of a particular company (or of one or more such companies) held within its system.  To date no clearance service operator has made an effective election in relation to a single line of securities. Certain clearance services^[4] operate a 'bi-cameral' system whereby participants may hold securities either in an 'elected' 0.5% regime (in which case transfers of ownership within the system will attract 0.5% SDRT charges) or in a 'non-elected' 1.5% regime (which requires the payment of a charge of 1.5% on entry but subsequent transfers will be free from SDRT charges).
16. 13 The approval process^[5] is the same for all types of election. In brief, HMRC will grant approval where, in summary, the operator of the clearance service (a) puts in place procedures and systems (which will have a degree of sophistication), to enable it to comply with the required arrangements for the recording, reporting, collection and accounting of 0.5% SDRT on future transfers of the relevant company's securities within its system, and (b) provides appropriate assurances and undertakings as to the operation of those procedures and arrangements including in respect of the 1.5% due from the clearance service (or its UK tax representative) on the termination of the election.
17. 14 Since section 97A was introduced:

(a) the following clearance services have made section 97A elections^[6]:

Sega Intersettle (International CSD ("ICSD") situated in Switzerland);

Jiway Ltd (a UK incorporated company)^[7];

Euroclear Bank (in part^[8]); and

Clearstream (in part^[9]).

The approximate length of time from the date that the operator of the clearance service made an initial approach to the Revenue with regard to a 97A election and the date that the election became effective following Revenue approval varied from between 6 and 16 months.

(b) the following clearance services (all of which hold UK chargeable securities) have not made section 97A elections:

Euroclear Netherlands (National Central Securities Depositary ("NCSD") in the Netherlands);

VPC (Swedish NCSD);

VPS (Norwegian NCSD);

Euroclear Belgium (Belgium NCSD);

Euroclear France (French NCSD, formerly SICOVAM);

Clearstream (in part^[10]) (ICSD situated in Frankfurt); and

Euroclear Bank (in part^[11]) (ICSD situated in Belgium).

The stock exchanges and settlement systems

The Paris Stock Exchange

18. 15 The Paris Stock Exchange, was established in 1724. In July 2000, it was the main stock exchange in France, which incorporated the six provincial stock exchanges in Bordeaux, Lille, Lyons, Marseilles, Nancy and Nantes. Euronext Paris SA (the current name of the company, previously known as Société des Bourses Françaises SA and, later, ParisBourseSBF SA) has operated the Paris Stock Exchange since 1998, and has also been responsible for the Nouveau Marché, the Marché des Options Négociables de Paris (MONEP), the Marché à Terme d'Instruments Financiers (MATIF) and Le Marché Libre since May 1999. In September 2000, the Paris Stock Exchange was renamed "Euronext Paris" and merged with the stock exchanges in Amsterdam and Brussels to become part of Euronext, Europe's first integrated stock exchange. Euronext Paris SA is now a wholly-owned subsidiary of Euronext NV, a Dutch holding company.

The SICOVAM clearance service

19. 16 The Société Interprofessionnelle pour la Compensation des Valeurs Mobilières, or SICOVAM, was created by Decree 49-1105 of 4 August 1949. SICOVAM was renamed Euroclear France on 10 January 2001. In July 2000, SICOVAM was the French settlement system for shares listed on the Paris Stock Exchange, and operated to provide market participants with an effective means of settling trades. Transactions through SICOVAM did not result in any change in the register of members (because SICOVAM, or, in the case of shares in UK incorporated companies, its nominee, Vidacos, remained the registered owner). SICOVAM maintained accounts in the names of banks and other financial institutions, which in turn maintained accounts in the names of clients. On being notified of a share sale, SICOVAM would make the appropriate entries reflecting the change of ownership of the shares held by it, and the financial institutions would likewise make the appropriate entries in the accounts reflecting the ultimate ownership of the shares by their clients.
20. 17 SICOVAM was regarded by the Inland Revenue as a "clearance service" for the purposes of sections 96 to 97B Finance Act 1986.
21. 18 The SICOVAM clearance service had a monopoly in France, being the sole depositary authorised by the Conseil des Marchés Financiers ("CMF") and recognised by Euronext. Accordingly, in July 2000, any company wishing to be listed on the Paris Stock Exchange was required to have an account opened in its name in the books of SICOVAM. Therefore, it was not possible for any company to have its shares listed on the Paris Stock Exchange without their being held through SICOVAM.
22. 19 Given that SICOVAM had not at the relevant time (and still has not) made an election pursuant to section 97A, the issue or transfer of shares into SICOVAM entailed a charge to SDRT of 1.5%. That charge would technically be payable by the clearance service or its UK nominee^[12] (as transferee of the shares) but it is usual^[13] for the issuer or transferor to pay the charge.
23. 20 SICOVAM holds UK registered shares through its nominee, Vidacos. Those shares are therefore registered in the name of Vidacos (for SICOVAM). SICOVAM holds those shares for certain former shareholders of CCF, and any trades in those shares on the Paris Stock Exchange will be completed by transfers within the books of SICOVAM and Vidacos.
24. 21 Vidacos is a member of CREST.

CREST

25. 22 In the following sub-paragraphs references to CREST mean CRESTCo Limited as Operator of the CREST system under the Uncertificated Securities Regulations^[14]. The description and comments below, although phrased in the present tense, represent both the position in 2000 and the position today. The description refers to shares, although the system actually applies to a wider range of securities.
26. 23 UK transactions in shares of UK companies are made by registration of a stock transfer form (where the shares exist in paper form) or through CREST (where the shares are in dematerialised form). The CREST system for electronic share transfers in the United Kingdom was first introduced in July 1996. In order to cater for the introduction of CREST, the Treasury passed the Uncertificated Securities Regulations, relaxing the general rule that a transfer must be made by a paper document. The regulations permit a paperless transfer of shares to be registered, provided it is made through an electronic system approved by the Treasury under the regulations. CREST was, and still is, the only system approved by the Treasury for this purpose.
27. 24 As a result of the introduction of CREST, SDRT has considerably grown in importance. The greater part of the yield from share transfers now comes in the form of SDRT, most of which is collected through CREST.^[15]
28. 25 CREST performs the following main functions:

(a) to enable shares to be held in dematerialised form and to be transferred electronically in real time without certificates or paper transfers;

(b) to arrange for shares to be delivered against payment;

(c) to operate automatic direct links with company registrars;

(d) to enable transactions to be reported to markets and regulators (e.g. the London Stock Exchange and the Financial Services Authority);

(e) to collect SDRT in accordance with procedures agreed with the Revenue; and

(f) to facilitate transactions in certified form (but not to collect stamp duty on such transactions).^[16]

29. 26 CREST may be distinguished from other systems, inter alia, the following respects.

(a) CREST is not a custodian, nominee or depositary in relation to shares held in the United Kingdom: it does not hold shares for others; it does not have any form of title to shares. Instead, it enables others to hold shares in an electronic dematerialised form, and facilitates settlement and execution of trades and other transfers. The entry of a shareholder on the electronic register maintained by CREST (and duplicated by the issuing company) is equivalent to the entry of certificated shares on an ordinary share register^[17].

(b) A clearance service^[18] (common in continental European jurisdictions), unlike CREST, holds shares. These shares are held either by the company operating the clearance system or its nominee. Changes in the beneficial ownership of the shares or, more usually, the civil law equivalent of beneficial ownership of the shares (i.e. rights in or over such shares) are settled by book entry and without the use of transfer documents.^[19]

CREST and SDRT

30. 27 CREST calculates, collects and accounts for SDRT on the basis of the inputs made by its participants. At Appendix 2 to this document is a summary of SDRT functionality in CREST^[20]. In addition, there are 27 different Transaction Stamp Status Flags that may be input by participants in CREST to indicate the nature of the transaction for SDRT purposes. Statutory exemptions from SDRT (such as on transfer to/from a nominee or to a charity or on an intra-group transfer) are implemented by the CREST participant specifying a particular code or "exception flag" in the details for the transaction (consisting of a capital letter or number). The participant will be expected to keep supporting evidence for the transaction and may be required to produce such evidence.^[21]

The arrangements

31. 28 On 7 June 2000, HSBC made an offer to acquire all of the issued shares of CCF. The purpose of the transaction was, from HSBC's perspective, to increase its global presence through a significant acquisition within the Eurozone.
32. 29 The offer was set at the price of €150 in cash per CCF share, and included a share alternative, whereby 13 ordinary shares of HSBC were offered in exchange for each CCF share. The offer was conditional on obtaining over 50% acceptances^[22]. However, only if acceptances exceeded 95% were rights (in French law) triggered to buy out any non-accepting shareholders (thereby facilitating HSBC's commercial objective of acquiring 100% of the share capital of CCF).
33. 30 In connection with the offer for CCF, HSBC arranged for its own ordinary shares to become listed on the Paris Stock Exchange. This additional Paris listing provided prospective accepting CCF shareholders with the ability to effect transactions in the HSBC consideration shares on the Paris Stock Exchange. In this regard, the offer document noted that the application for listing of HSBC shares on the Paris Stock Exchange had been approved by the board of the Paris Stock Exchange and was at that time subject only to the success of the offer and the approval by the COB^[23].
34. 31 The purpose of the Paris listing of HSBC's shares was to make those shares more attractive to CCF shareholders and thereby to improve the prospects of success for acceptance of HSBC's offer for CCF. In addition, by encouraging the uptake of the share alternative and thereby reducing HSBC's own financing costs, the Paris listing further facilitated the transaction for HSBC.
35. 32 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 (see paragraph 16 above);

(b) via CREST, the UK settlement system for shares in uncertificated form (see paragraph 22 above); and

(c) by registration on HSBC's share register in certificated form.

36. 33 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% would be payable on (a) but that HSBC would pay it^[24].
37. 34 The offer period was open from 7 June 2000 until 12 July 2000 inclusive. The acquisition of the overwhelming majority of the CCF shares was successfully completed on 24 July 2000. HSBC subsequently implemented the compulsory acquisition procedure in relation to the outstanding minority.
38. 35 Trading in HSBC ordinary shares commenced on the Paris Stock Exchange on 28 July 2000.

The charge to SDRT in relation to the arrangements

39. 36 The HSBC ordinary shares issued as consideration for the acquisition of CCF were "chargeable securities" within the meaning of section 99(3) of the Act. Upon those shares being issued to Vidacos, sections 96(1) and (2) of the Act provided for SDRT, at the rate of 1.5% of the "price" or value of the consideration shares, to be payable to the Inland Revenue.
40. 37 Although, pursuant to section 96(6) of the Act, the liability to pay the SDRT was imposed on SICOVAM and/or Vidacos, HSBC had agreed with SICOVAM to pay any SDRT payable.
41. 38 Following correspondence and a telephone discussion between HSBC and the Inland Revenue Stamp Office on 24 and 25 July 2000, HSBC paid the sum of £27,375,523.75 in satisfaction of the SDRT payable directly to the Stamp Office on 26 July 2000. This was calculated by reference to the cash foregone by the shareholders who accepted HSBC shares (and where the shares were issued into SICOVAM) rather than cash (i.e. €150, the cash offer, divided by 13, the number of HSBC shares offered per CCF share, giving a "price" or value per HSBC share of €11.54, translated into sterling at the mid-market closing rate on 25 July 2000). On 1 August 2000, the Inland Revenue issued a receipt to HSBC, with reference "DMBH" and customer number "SDRT/CHAPS", for the payment by HSBC of SDRT in the amount of £27,375,523.75.

Subsequent events

42. 39 In total, CCF shareholders elected to receive 255,607,131 HSBC shares via SICOVAM. Of these shares, approximately 105 million (or 41%) were withdrawn from SICOVAM and dealt with within 2 weeks on the London Stock Exchange. Trading in the shares commenced on 28 July 2000 and the first transfers out of Vidacos took place on 31 July 2000. Subsequent transfers of these shares within CREST have been subject to SDRT at the usual rate of 0.5%.
43. 40 HSBC shares remain listed on the Paris Stock Exchange. HSBC offers its shareholders the opportunity to receive dividends in the form of scrip dividends. When the underlying HSBC shares are held in SICOVAM, those scrip dividends are issued into SICOVAM. Since 2001, 2,213,267 shares have been issued into SICOVAM as a consequence of elections by shareholders to receive scrip dividends instead of cash dividends. These shares have given rise to total SDRT charges (at 1.5%) amounting to US$477,353.35. The cost of this SDRT charge has been passed on to HSBC's French shareholders who hold their shares in SICOVAM through the price paid for the scrip dividends, with the result that HSBC shareholders holding through SICOVAM received 1.5% fewer shares than other shareholders.

The claim and appeal process

44. 41 By a letter dated 18 October 2002 Messrs Norton Rose submitted a claim to the Inland Revenue on behalf of HSBC, for repayment of the SDRT paid by HSBC on 26 July 2000, together with a further claim for interest. The letter asked that, if the sums were not repaid, the Board of Inland Revenue issue a notice of determination pursuant to Regulation 6 of the 1986 Regulations (SI 1986/1711), that a charge to SDRT arose under section 96 of the Act in consequence of the relevant arrangements^[25]. The letter claimed:

(a) that the charge under section 96 of the Act to SDRT was incompatible with Articles 10 and 11 of EC Directive 69/335/EEC, as amended and was in breach of the obligations of the UK under Articles 43 (right of establishment), 49 (freedom to provide services) and 56 (free movement of capital) of the EC Treaty, as amended; alternatively,

(b) that the transaction should have been treated as exempt under section 97(4) of the Act, the restriction of that exemption to cases where the target shares are held in a clearance service being invalid under EC law as discriminatory and a restriction on the freedoms already mentioned.

45. 42 A Notice of Determination was issued on 6 August 2004 under Regulation 6 of the 1986 Regulations that a charge to SDRT arose under section 96 of the Act in consequence of the relevant arrangements; and a notice of appeal against the determination was lodged on 2 September 2004.
46. 43 APPENDIX 1 TO THE AGREED STATEMENT OF FACTS

The Guidance Notes dated February 1998 issued by the Stamp Office of the Inland Revenue stated:

"Under Section 97A, as introduced by Finance Act 1996, the operator of a clearance service can elect that the clearance service charge does not apply. To do so an undertaking in writing must be agreed by the Inland Revenue. The terms of the undertaking will include:-

a. To collect and account for SDRT on the same basis as an operator of a dematerialised settlement service or an RIE subject to any different arrangement agreed with the Inland Revenue.

b. To provide systems to operate any reliefs, exceptions etc. or apply standard or higher rate charges to SDRT as appropriate and comply generally with the SDRT legislation and the SDRT notes for guidance.

c. To provide the Stamp Office with details of all liable or potentially liable transactions.

d. To secure written undertakings from participants in the clearance service that they are not themselves providing clearance services or operating a depositary receipt scheme or acting as nominees thereof. Failing the provision of such an undertaking the higher rate charge is to apply to any transfers to their account. The undertaking is to include a continuing requirement to notify any changes which would bring transfers within the higher rate charge. Where a participant operates a clearance service or is nominee for one and the operator has also made an election under Section 97A (as acknowledged by the Stamp Office), the standard rate and various exceptions etc. are to apply on transfers to that participant. The obligation to be contractually passed down onto clients of the participants and the clients of clients etc.

e. To secure an undertaking from participants to report and account for SDRT on transactions in chargeable securities which do not give rise to a system transaction, for example agency crosses.

f. To require participants to provide information and access to records as provided under the SDRT regulations. A non-resident operator is required either to maintain a UK fiscal representative in order to provide access to records and information or an electronic data terminal is to be provided to the Stamp Office together with an acceptable guarantor for payment of SDRT. Acceptable guarantors would be the bank operating the clearance service nominee if UK resident or a bank affiliate, if the nominee or operator is not resident in the UK. A participant waives confidentiality for the Stamp Office in respect of its dealings in chargeable securities held by the clearance service.

g. To undertake to disclose client identity where exceptions or exemptions from SDRT are claimed. A consequence of the election would be that participants would be relieved from making returns of SDRT liability to the extent that all such liable or relevant transactions in chargeable securities were reported or accounted via the operator of the clearance service.

h. To undertake to implement the higher rate charge in the event of system abuse by a participant. (The Stamp Office would infer that the participant is operating a clearance service or depositary service in the absence of evidence to the contrary.)"

The Inland Revenue Stamp Taxes Manual (2000 edn.^[26]) stated:

"14.13 Under Section 97A FA 1986, the operator of a clearance service can elect that the clearance service charge does not apply provided that they enter into appropriate arrangements with the Inland Revenue under which they will account for 0.5% charges arising on transfers within the clearance service. You should seek advice from a Deputy Director if anyone suggests entering into such an arrangement with us.

14.14 The details of any such arrangement will depend on the particular circumstances involved, but some of the main issues to be considered in this context are:-

comparability with the procedures for accounting for SDRT through CREST;

ensuring that all chargeable transactions are reported and duty paid;

considering how higher rate charges and any reliefs would be administered;

ensuring a flow of information for audit purposes that is accessible in the UK;

preventing participants operating clearing services under cover of the arrangements;

the need for an overseas clearance service to appoint a UK fiscal representative; and

noting that section 97A enables us to terminate the election on notice."

A copy of chapter 14 of the current version of the Stamp Taxes Manual (2002) (which, in relation to the above passage, is in identical form to the 2000 Stamp Taxes Manual) is exhibited to this Agreed Statement at Exhibit "SOF1".

47. 44 APPENDIX 2 TO THE AGREED STATEMENT OF FACTS

Euroclear Consultation Paper

Appendix 1: UK SDRT and Irish stamp duty processing

48. 45 EXHIBIT SOF1 TO THE AGREED STATEMENT OF FACTS

Stamp Taxes Manual (March 2002)

Chapter 14: SDRT: Depositary receipts and clearance services

49. THE CONTENTIONS OF THE PARTIES
50. 1 In brief summary, the Appellants contend that:

(1) The charge to SDRT contravened articles 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 on the issue of shares and/or on the admission of shares to quotation on a stock exchange. Given that the tax thereby fell within article 10 and/or article 11, it could not also be a tax within (the mutually exclusive) article 12 of the Capital Duty Directive and was prohibited; and/or

(2) The charge to SDRT violated the fundamental freedoms in Articles 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

(3) The transaction should have been treated as exempt under s97(4) Finance Act 1986 on the grounds that the restriction of that exemption to situations where the target shares are (in effect) UK companies is discriminatory and contrary, inter alia, to article 12 of the EC Treaty.

51. 2 In brief summary, the Respondents contend that:

(4) The charge to SDRT falls within article 12 of the Capital Duty Directive as a tax on transfer because (a) the 1.5% charge is a 'season ticket' charge that is a means of paying in advance and in lieu the SDRT that would otherwise fall due to be paid at 0.5% for each future transfer of the share within the clearance service; and/or (b) the charge is not obligatorily payable since the operator has the opportunity to elect under section 97A instead to account for the standard 0.5% charge on transfers, provided it meets the conditions for such election imposed by HMRC.

(5) Articles 43, 49 and 56 are not infringed by the charge to SDRT because the operator of clearance services in a Member State other than the UK is placed in the same position as an operator in the UK and, as a result, the charge entails no direct or indirect discrimination on grounds of nationality and does not create an impediment to trade.

(6) Section 97(4) is not discriminatory because (a) it is permissible to afford exemption from charge where an amount has already been paid to cover future transactions but not to afford such exemption where that is not the case and/or (b) the operator could have avoided the charge had it made a section 97A election.

52. THE QUESTION

In light of these respective contentions, a ruling of the European Court is considered appropriate to resolve the matters in dispute between the parties. Accordingly, the Special Commissioners refer the following question to the European Court:

Does Article 10 or Article 11 of Council Directive 69/335, as amended by Council Directive 85/303/EEC of 10 June 1985 (OJ 1985 L 156, p. 23), or Article 43, Article 49 or Article 56 of the EC Treaty or any other provision of European Community law prohibit the levying by one Member State ("the first Member State") of a duty on the transfer or issue of shares into a clearance service of 1.5% when:

i. a company ("Company A") established in the first Member State offers to acquire the listed and traded shares in a company ("Company B") established in another Member State ("the second Member State") in return for shares in Company A, to be issued on the stock exchange in the second Member State;

ii. shareholders in Company B have the option to receive the new shares in Company A either:

a. in certificated form; or

b. in un-certificated form through a settlement system in the first Member State; or

c. in un-certificated form through a clearance service in the second Member State;

iii. the law of the first Member State provides, in summary, that:

a. in the event of the issue of shares in certificated form (or in un-certificated form in the settlement system for dematerialised shares of the first Member State), duty shall not be charged on the issue of the shares but on each subsequent sale of the shares, which duty is charged at the rate of 0.5% of the consideration for the transfer; but

b. on the transfer or issue of un-certificated shares to the operator of a clearance service, duty shall be charged (where the shares are issued) at the rate of 1.5% of the issue price or (where the shares are transferred for consideration) at the rate of 1.5% of the amount or value of the consideration or, (in any other case) at the rate of 1.5% of the value of the shares and, no subsequent charge is thereafter levied on sales of the shares (or of rights to or over the shares) within the clearance service.

c. the operator of a clearance service may, where it receives the approval of the relevant taxation authority, elect that no duty is charged on the transfer or issue of the shares to its clearance service, but that duty is instead charged on each sale of the shares within the clearance service, at the rate of 0.5% of the consideration. The relevant taxation authority may (and presently does) require, 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 considers satisfactory) for the collection of the duty within the clearance service and for complying or securing compliance with the regulations in relation to it.

iv. the arrangements in force at the stock exchange in the second Member State require that all shares issued in that jurisdiction must be held in un- certificated form through a single clearance service established in the second Member State, the operator of which has not made the election referred to above?

SECOND SCHEDULE

Documents included in the bundles of documents along with this Order

	Notice of Determination dated 6 August 2004
	Letter of appeal dated 2 September 2004
	Offer document
	Correspondence
	Sections 141, 148 and Schedule 14 to the Finance Act 1988
	Part IV of the Finance Act 1986
	The Stamp Duty Reserve Tax Regulations 1986 (1986 No. 1711)
	Inland Revenue Budget Press Release dated 28 November 1995
	Stamp Duty Reserve Tax Notes for Guidance, Chapter 6 (February 1998)
	Stamp Taxes Manual, Chapter 14 (2000)
	Stamp Taxes Manual, Chapter 14 (March 2002)
	Witness statement of NC McCarthy signed 21 June 2007
	Exhibit to witness statement of NC McCarthy
	Witness statement of M Harwood signed 10 October 2007
	Witness statement of DC Stuttaford signed 20 November 2007
	Exhibit to witness statement of DC Stuttaford
	Supplementary witness statement of M Harwood signed 26 November 2007
	Supplementary witness statement of DC Stuttaford signed 27 November 2007

Note 1   Stamp Taxes Manual (2002) para 1.6.    [Back]

Note 2   Stamp Taxes Manual (2002) para 1.18.     [Back]

Note 3   Published in May 2000.    [Back]

Note 4   Identified in footnotes 6 and 8-11 to paragraph 14 below.    [Back]

Note 5   See paragraph 10 and Appendix 1 to this Agreed Statement of Facts.    [Back]

Note 6   Sega Intersettle, Euroclear Bank and Clearstream ICSDs operate bicameral systems: one part has made a section 97A election and one part has not.    [Back]

Note 7    Jiway has since ceased trading.    [Back]

Note 8   Sega Intersettle, Euroclear Bank and Clearstream ICSDs operate bicameral systems: one part has made a section 97A election and one part has not.    [Back]

Note 9   Ibid.    [Back]

Note 10   Ibid.    [Back]

Note 11   Ibid.    [Back]

Note 12   s.96(7)    [Back]

Note 13   Within CREST (described below), the transferor is automatically debited with the 1.5% charge, unless the participant otherwise stipulates.    [Back]

Note 14   The Uncertificated Securities Regulations 1995 SI 1995/3272, which were in force at the time of the HSBC offer, although since replaced by the Uncertificated Securities Regulations 2001 SI 2001/3755.    [Back]

Note 15   Stamp Taxes Manual (2002) para 1.18    [Back]

Note 16   Stamp Taxes Manual (2002) para 10.18    [Back]

Note 17   Regulation 20 of the 1995 Regulations. (See now regulation 24 of the 2001 Regulations). Individual shareholders may hold uncertificated shares directly (in which case, they must be members of CREST) or through nominees (who would themselves be members of CREST).    [Back]

Note 18   See paragraph 9(d) above.    [Back]

Note 19   Stamp Taxes Manual (2002) para 14.10.    [Back]

Note 20   Extracted from the Euroclear Consultation Paper entitled "Miscellaneous items on the single platform" dated 5 May 2006    [Back]

Note 21   See Stamp Taxes Manual (2002) paras 10.26-10.32.    [Back]

Note 22   Offer Document, p.9.    [Back]

Note 23   Offer Document p. 10.    [Back]

Note 24   Offer Document p.10    [Back]

Note 25   The issue of a notice of determination was a prerequisite to the commencement of proceedings by HSBC for the repayment of the SDRT it had paid.    [Back]

Note 26   Published in May 2000    [Back]