In this post, Hannah Jones, Assistant Professional Support Lawyer in the Tax team at CMS, comments on Commissioners for Her Majesty’s Revenue and Customs v Coal Staff Superannuation Scheme Trustees Ltd [2022] UKSC 10, a case which concerns the UK’s pre-2014 tax treatment of manufactured overseas dividends.


This Supreme Court case concerned the UK’s pre-2014 tax treatment of income paid to the Respondent (Coal Staff Superannuation Scheme Trustees Ltd (the “Trustee”)) as lender under stock lending agreements.

In basic terms, stock lending agreements are arrangements by which an investor lends a stock portfolio to a borrower, normally for (i) a return equivalent to the shares at the end of the term and (ii) payments of amounts similar or equal to the dividend which the investor would have expected to receive, had they not lent the shares. Generally, these lending arrangements are entered into so that the borrower can use the shares in ways that might not be appropriate for the lender; for example short selling. As such, the borrower is not normally required to continue to own the shares during that time.

Where the agreement involves the payments to the investor which are equivalent or based on the dividend which the investor would have received, these are known as “manufactured dividends”. Where that payment is made by a company tax resident overseas, it is known as a “manufactured overseas dividend” – with the pre-2014 tax treatment of such dividends being known as “the MOD rules”.

The manufactured dividend rules sought to treat the receipt of manufactured dividends (both overseas and domestic) in the same way as if the investor had received an actual dividend. That meant that, where the payment from the borrower was a manufactured overseas dividend, it was subject to withholding tax at source equivalent to what would have been paid had the investor received the dividends from the shares directly. As would be the case for normal dividend withholding tax payments, the MOD rules allowed the investor to claim a tax credit against the notional overseas withholding tax levied on the borrower. However, such credit was useless to UK tax exempt investors – such as the Trustee (being the trustee of a UK pension scheme) in this case.

The Trustee therefore argued that the MOD rules contravened the free movement of capital, contained in Art 63 of the Treaty on the Functioning of the European Union (the “TFEU”), by disincentivising investment overseas.

It is important to note that the UK’s tax treatment of “actual” dividends was not in question throughout the case. Even though the MOD rules were designed to mimic the UK tax treatment for UK investors directly receiving overseas dividends – and the Trustee would face the same “disincentive” had they directly invested in overseas shares, given their exempt status – it is common ground that the UK’s dividend taxation regime (and its credit method of unilateral relief from double taxation) was not contrary to EU freedoms. Indeed, in paragraph 7 of the judgment, Lord Briggs and Lord Sales set out that so-called juridical taxation is a “fact of life”, given that each member state has sovereign authority over its own tax affairs.

The key question was therefore whether the UK’s MOD rules (which artificially apply the normal dividend taxation rules to manufactured dividends) amounted to a restriction on the free movement of capital (Issue 1). The following two questions were also before the court:

  • whether, if there was an unlawful restriction on Article 63, was it justified?
  • if it was not justified, what would be the appropriate remedy for infringement?

Decision of the lower courts

The First Tier Tribunal (Tax and Chancery Chamber) considered that there was no restriction offending Article 63. Their key finding in this regard was that it was the UK’s general withholding tax regime which dissuaded investment in overseas shares, and, given that the MOD rules merely replicated this, the MOD rules could not amount to such a restriction.

However, the Upper Tribunal found for the Trustee, and, in the Supreme Court’s words, “in substance adopted the whole of [the Trustee’s] case” (paragraph 36 of the judgment). Contrary to the First Tier Tribunal’s findings, they found that the difference in the treatment of manufactured dividends and manufactured overseas dividends was solely attributable to the UK tax regime (unlike the difference in the treatment of actual dividends). The Upper Tribunal further held there was no justification for the restriction, and that the appropriate remedy was a repayment of the withholding tax in full to the Trustee.

The Court of Appeal came to the same conclusion as the Upper Tribunal, but for different reasons. Key to their judgment was that the borrower was under no obligation to hold onto the shares. Therefore, “the dividend of which the manufactured overseas dividend was representative may not then have been subject to overseas withholding tax at the rate used for the MOD regime, if at all”; and as such, the MOD regime was liable to discourage investors from buying or retaining overseas shares. Similar to the Upper Tribunal, the Court of Appeal rejected HMRC’s case on justification, and held that full repayment of the withholding tax was the appropriate remedy.

Supreme Court decision

The Supreme Court overturned the judgment of the Court of Appeal. They found for HMRC on Issue 1 – i.e., that the MOD regime did not infringe Article 63. They also went on to consider, obiter, Issue 3 – what would have been an appropriate remedy had Article 63 been so infringed.

On Issue 1, the Supreme Court took the view that “the answer depends on a market analysis of the effect of the MOD tax regime upon the investor, best undertaken by the application of the “but for” test (paragraph 42).

In applying this test, the Supreme Court found that, in the stock lending arrangements under consideration:

  • the borrower intends to make profitable use of the shares, through using the shares in ways that the lender does not wish to;
  • the lender intends to benefit from borrower’s use of the shares through the payment of stock lending fees from the borrower, while the payment of the manufactured overseas dividends ensure that the lender’s net income stream is not less than they would have received had they held the shares directly.

It was the fact that the Trustee’s benefit from choosing to enter into a stock lending arrangement was found in the form of the stock lending fee – and not the payment of the manufactured overseas dividend (noting they would have received a dividend had they not entered into the arrangement) – that was key to the Supreme Court’s decision. The court found that the MOD regime in no way negatively impacted the negotiation or payment of the stock lending fee, and, further, the stock lending fee was exempt from tax in the hands of the Trustee.

Further, and importantly, the borrowers here never had to account to HMRC for the notional withholding tax payable to the overseas’ tax authority, because they always had sufficient withholding tax credits.

The court went on to consider what the appropriate remedy would have been, had there been a restriction of Article 63. Given that (i) the MOD regime pre-2014 is no longer applicable and (ii) this is likely to be one of the last Supreme Court cases on TFEU freedoms, the court’s comments on remedy may be of more relevance to taxpayers.

The Trustee had argued that the appropriate remedy was restitution; a payment of a sum equal to the full sum of the “unusable” withholding tax credits to the lender. The judgment roundly rejected this remedy, given that:

  • the MOD rules levied the withholding tax on the borrower, and not on account of the lender;
  • HMRC, in this scenario, had never actually received any payments of the notional withholding tax due to the availability of the borrower’s withholding tax credits; and
  • it would in any case be disproportionate for the relief to be a payment of a sum equal to the full amount of the credits; the appropriate remedy would have been limited to the actual economic effect on the Trustee of the dissuasive effect of the MOD regime on investing overseas.


This case is likely to be largely of academic interest only, given that (i) Article 63 is no longer applicable to UK legislation, and (ii) the case concerns the pre-2014 MOD regime. However, practitioners may find the court’s obiter comments on restitutionary claims interesting.