STSM055150 - Depositary receipt and clearance services: scope of 1.5 per cent charge: Stamp Duty Reserve Tax - optional share reserve stock dividend paid with an issue of shares

An optional share reserve stock/cash dividend represents an arrangement whereby a shareholder may elect under the terms of a United Kingdom incorporated company’s Articles of Association to take part or all of a dividend payment in newly issued shares rather than cash. Where the shareholder elects to receive the dividend payment in shares, the value of the cash dividend foregone will be used to subscribe for an issue of new shares out of the share reserve of the company that are then distributed to the shareholder as a share reserve stock dividend.

In the situation where a shareholder elects, or a depositary receipt or clearance service system located anywhere in the world elects on behalf of an account holder, to receive a dividend in the form of newly issued shares in a United Kingdom incorporated company which are to be simultaneously delivered to a depositary receipt issuer or clearance service, no 1.5% SDRT charge will arise.

This is because, following the decisions by the European Court of Justice (ECJ) in October 2009 in the case of HSBC Holdings PLC and Vidacos Nominees Ltd v Commissioners for HM Revenue & Customs (C569/07), and the First-tier Tribunal (Tax Chamber) in March 2012 in the case of HSBC Holdings PLC and the Bank of New York Mellon Corporation v Commissioners for HM Revenue & Customs (TC/2009/165484), HM Revenue & Customs (HMRC) accept that the charging of 1.5% on share issues is incompatible with European Union law. In these circumstances, HMRC do not seek to collect 1.5% on UK company share issues to a depositary receipt issuer or to a clearance service.

Any subsequent trading or renunciation of dividend shares in a United Kingdom incorporated company with a specific intention of simultaneously delivering them to a depositary receipt issuer or clearance service may, however, give rise to a 1.5% Stamp Duty or SDRT charge by virtue of FA86/S67 (2), FA86/S70 (2), FA86/S93 (4)(b) or FA86/S96 (2)(b).

In the situation where dividend issued shares in a United Kingdom incorporated company are later traded and the registered shares are transferred, and an ‘arrangement’ is entered into before or at the time of the purchase to deliver such securities to a depositary receipt issuer or clearance service, the 0.5% SDRT charge that would otherwise apply under FA86/S87 is cancelled by the provisions of FA86/90 (4) and offset by the 1.5% SDRT accountability that arises under FA86/S93 or FA86/S96.

Any subsequent appropriation or deposit of an optional share reserve stock dividend, represented by shares in a United Kingdom incorporated company previously received by a shareholder, to a depositary bank or clearance service is subject to a 1.5% charge, calculated by reference to the market value of the securities at the time of appropriation by virtue of FA86/S67 (3) and, FA86/S70 (3), FA86/S93 (4)(c) and FA86/S96 (2)(c).

EU Exit

The United Kingdom’s exit from the European Union took place on 31 January 2020.

Article 126 of the Agreement on the Withdrawal of the United Kingdom of Great Britain and Northern Ireland from the European Union and the European Atomic Energy Community (the Withdrawal Agreement) provides for a ‘transition period’ which ends on 31 December 2020.

The 1.5% charge on issues will remain disapplied under the terms of the European Union (Withdrawal) Act 2018 following the end of the transition period and this will remain the position unless stamp taxes on shares legislation is amended.

This is because the direct effect of the relevant provisions of the EU Capital Duties Directive (Council Directive 2008/7/EC of 12 February 2008 concerning indirect taxes on the raising of capital) was confirmed by the First-tier Tribunal in the HSBC and Bank of New York Mellon case before Exit Day.