Vodafone shares sink under tax bill

Vodafone has revealed it is facing an enormous £5bn tax bill over the next three years. The group dropped a place to fifth in the FTSE100, after it revealed the extent of its tax issues and other downbeat prospects during its interim results announcement last week.

Though the liabilities have been provided for on the balance sheet, they are now imminently payable. The total includes £2bn as part of a group litigation order brought by Vodafone in the European Court of Justice.

Vodafone is just one of the multinational companies bringing a GLO over the enforceability of UK tax law within the European framework. But while other GLOs challenge individual aspects of the rules, Vodafone’s claim goes further by challenging HM Revenue & Customs’ right to even ask questions about foreign subsidiaries, or controlled foreign companies (CFC) as they are known in UK tax rules.

Vodafone’s argument is that, if a separate Cadbury Schweppes claim on CFC succeeds and the CFC rules prove unenforceable, there is no need for it to comply with HMRC’s request for information.

Court documents reveal that Vodafone will argue that ‘since the imposition of UK tax contravened Articles 43 and 56EC, there could be no valid requirement to produce documents or provide information in relation to any part of the enquiry that relates to compliance with the CFC legislation’.

HMRC had asked for more information on its subsidiary Vodafone Investments Luxembourg Sarl (VIL Sarl). Vodafone disposed of shares in Mannesman into VIL Sarl, after it took over the former in the late nineties during one of the largest M&A deals in corporate history.

Vodafone’s annual report and accounts disclosed earlier this year that the case was worth £1.75bn.

CFC rules are designed to prevent companies channeling funds offshore to avoid tax, and any successful challenge to HMRC’s ability to ask questions about them would drive a hole in its anti-avoidance programme.