ECJ forces review of multi-national tax

The government has re-opened a behind-the-scenes consultation on corporation tax reform, in a move that could see a radical shake-up of the way big blue-chip corporations are taxed.

The move is intended to bring the UK in line with EU single market rules amid a welter of challenges to UK tax law at the European Court of Justice, and could see Britain ditch the taxation of dividends. It could also introduce strict new rules on interest relief making deals like Ferrovial’s agreed bid for BAA more difficult.

Sources said various groups, comprising representatives of professional bodies and large companies, have begun discussions on reform as a whole series of legal judgments on the acceptability of UK tax rules within the EU come in.

The groups met occasionally last year, and are now being mobilised once again to tackle the whole-scale reform of UK corporate tax law.

Among the topics under discussion are dropping the taxation of dividends, some limitation on interest relief on profits, and some tinkering with other rules to make the system work as a whole.

The government is keen to ensure that the review will be revenue neutral, though for companies with various different structures it is likely to have widely varying impacts.

One source said: 'Exempting dividends seems to most of us completely inevitable. The UK is going to have to do this.'

Any move on interest relief could prove very unpopular, since many multi-nationals make use of the UK’s system in heavily leveraging UK businesses to limit tax bills.

Deals like the BAA purchase, and other forms of inbound investment, commonly involve heavily indebted structures that use the relief.

Sources suggested that ditching the relief seemed unlikely, though some rules limiting the dumping of debt could be brought in.

As part of the review, corporates are also thought to have tried to reopen a debate about reform of the scheduler system, the unpopular and complex way in which profits from various different trades are taxed.

Many recent ECJ opinions have gone against the government, with the UK facing the prospect of defeat against Cadbury Schweppes.