BP is seeking £300 million ($489 million) in refunds, interest and compensation resulting from the 1.5% levy placed on shares that the company issued to pay for its purchase of Arco.
The energy company argues that the stamp duty reserve tax is meant to tax paperless share transfers, but should not have been applied to an issuance of American shares, which is what the company offered to investors to raise capital for its acquisition.
JP Morgan Chase, which issued the US shares and Guaranty Nominees, the nominee for the shares, are named as co-claimants in the suit.
This suit is part and parcel of a series of cases against the UK government which argue that the stamp duty reserve tax, which must be paid when UK shares are issued to a depositary, was unfairly applied.
“It is a big deal that people are challenging the basis on which the tax was imposed,” said a UK tax practitioner familiar with the issues in the case.
“In a sense, they are saying that the entire basis for the tax is unsound,” he said.
In papers filed before the court, BP claims that though its lawyers believed that the company had to pay the tax in 1999, in the wake of a European Court of Justice (ECJ) decision in a case that the bank HSBC brought, the company has come to believe that HMRC wrongly assessed the tax.
After that 2009 decision in which the ECJ ruled that shares issued through a UK clearinghouse would not be subject to stamp duty tax, HMRC told companies that they would have six years from the date of payment to file refund claims for taxes paid in these circumstances.
HMRC has argued that BP’s claims are untimely because the payments at issue were made more than a decade ago.
The UK tax authorities introduced the stamp duty reserve tax in the 1986 Finance Act. Since the tax was originally conceived as a tax on documents and transfer instruments, companies began instead issuing shares on a depositary where people could trade interests in those shares rather than the shares themselves, thereby avoiding the tax.
This problem became especially acute in the 1980s when transatlantic takeovers were occurring frequently. Revenue realised UK companies were creating American depositary receipts (ADRs) to skirt payment of the tax, and that Britain was thereby losing out on significant amounts of money.
Now BP says that the law was never intended to apply to the issuance of ADRs, but should only be levied on shares issued in London.
BP encountered this same issue in its merger with another US competitor, Amoco, in 1998. The company also issued ADRs in this instance, but HMRC subsequently amended the rules and clarified that the tax was meant to apply to the issuance of any new shares.
John Bartlett, group head of tax at BP, said in an email that the company would not be issuing a public statement on the matter.
The UK practitioner said that he had been contacted by a representative of HMRC about giving expert evidence in the case as to the nature of ADRs.
“It was clear that he had been asking a lot of people,” he said. “But anyone that has acted for a UK issuer is not going to be capable of assisting Revenue against the underwriters.”
“This is an endemic issue,” he added. “It is particularly important because the stamp tax is one of the most efficient taxes, in terms of what it costs the government to collect it.”
