Treatment of manufactured overseas dividends

The taxpayers were the trustees of the British Coal Staff Superannuation Scheme. They claimed repayment of withholding tax on manufactured overseas dividends which were exempt from UK tax.

HMRC refused the claims. The First-tier Tribunal dismissed the trustees’ appeal but the Upper Tribunal overturned that decision saying the manufactured overseas dividends regime (TA 1988 Sch 23A para 4) was a restriction on the freedom of movement of capital that could not be justified. HMRC appealed.

The Court of Appeal said the rate at which tax was deducted under the manufactured overseas dividend regime was not necessarily the same as the sum withheld by the overseas country on the real dividend. But it seemed that the regime limited the returns available to investors from stock lending of overseas shares so was liable to discourage them from buying or retaining overseas shares. Investment in UK shares gave rise to...