* HSBC in line for 27 million sterling tax refund
* Government stops levying illegal duty on share clearance
* Britain may reissue an amended rules for clearance (Adds new Revenue and Customs statement, paragraph 7)
By Huw Jones
LONDON, Oct 1 (Reuters) - Britain scrapped a tax on some share transactions on Thursday after the European Union's top court ruled it breaks EU law, leaving an already cash-strapped British treasury facing a huge refund bill from companies.
Europe's biggest bank, HSBC, argued in the European Court of Justice that when it bought French rival CCF in 2000, it had to pay a 1.5 percent British stamp duty reserve tax totalling 27 million pounds ($43.04 million) on new shares it offered to CCF shareholders through a French clearing service.
The court said the duty contravened the EU's capital duty directive in a ruling that British firms that have been involved in a cross-border takeover will study carefully.
Britain's Revenue and Customs said it would stop levying the 1.5 percent tax immediately on share transactions using a clearing service elsewhere in the EU pending a review.
"The government's policy position remains that transactions involving UK shares should bear their fair share of tax," a Revenue and Customs spokesman said.
"In light of today's judgement, we will determine whether and how to amend the stamp duty reserve tax rules to ensure movements of shares into and within clearance services bear their fair share of tax, whilst ensuring the rules are compatible with Community law," the spokesman added.
In a later statement Revenue and Customs said it would urgently propose legislation to ensure that its removal of the 1.5 percent tax for EU transactions did not create a loophole enabling securities destined for the United States to avoid tax.
Revenue and Customs said the ruling will only hit a small part of the overall tax yield, estimated at "generally only tens of millions" of pounds a year.
HSBC welcomed the "favourable ruling from the European Court of Justice which clarifies the position on this issue".
The Luxembourg court said in its ruling the EU law "must be interpreted as meaning that it prohibits the levying of a duty such as that at issue in the main proceedings, on the issue of shares into a clearance service."
The EU rules seek to promote the free movement of capital across the 27-nation bloc but the stamp duty of 1.5 percent was higher than the 0.5 percent domestic British duty on share transactions, the court noted.
The HSBC shares for CCF stockholders came from an increase in capital and should not be taxed, the court said.
The case goes back to a British court where HSBC is expected to ask for a refund of the duty, with other companies in a similar situation expected to follow suit.
"It means a very significant exposure to the UK Treasury with potentially billions of pounds to be paid to UK companies who have paid the tax previously," said Mark Persoff, a partner specialising in financial law at Clifford Chance.
"The way we impose transaction taxes on share transactions will have to be completely rethought," Persoff said.
KPMG said claims for refunds from British companies will run to between half a billion and one billion pounds.
"This particular case concerned a European clearance system. But in our view the same principle should apply where shares have been issued into the U.S. depositary receipt system. This means there is the potential for claims way beyond purely European cases," said Chris Morgan, KPMG's head of international corporate tax.
"HMRC (UK Treasury) will be expecting claims from taxpayers going back over the past six years but potentially such claims could go back as far as 1986," Morgan said.
The stamp duty reserve tax affects cross-border merger and acquisitions activity such as when a British company is offering shares through a foreign clearing company as part payment for the target company.
The ruling could also affect banks raising regulatory capital through preference shares or companies accessing the U.S. ADR market, Persoff said.
The ruling will not affect a separate stamp duty on share purchases within Britain. ($1 = 0.6273 pound) (Reporting by Huw Jones; additional reporting by David Milliken; Editing by Rupert Winchester and Simon Jessop)