Group relief payouts expected after EC move

British companies claiming tax relief on losses incurred elsewhere in the European Union could receive payouts worth hundreds of millions, after the European Commission criticised the UK’s interpretation of a key court judgment.

The EC told the UK its interpretation of the Marks & Spencer judgment from the European Court of Justice, handed down in 2005, was ‘unnecessarily restrictive’.

Marks & Spencer argued it should be allowed to offset losses in France, Germany and Belgium against its group profits, claiming approximately £30m back in tax.

But when the ECJ ruled the losses were allowable, the UK Treasury introduced legislation that partially limited the potential relief.

‘We [Deloitte] don’t think they’ve complied and there’s also been other professional comment from within the UK that says the rules have been too tight,’ said Bill Dodwell, tax partner at Deloitte.

The Treasury is thought to have been surprised by the EC intervention.

Peter Cussons, international corporate tax partner at PricewaterhouseCoopers, said it was difficult to measure final losses ­ the proposed method of calculation of allowable losses ­ but is not expecting exorbitant payouts to litigating companies.

‘If it’s final losses, then it’s probably not mega bucks ­ a few hundred million,’ he said.

The group relief case was regarded as potentially one of the most damaging for the UK government of all the group litigation orders, the series of tax cases which had threatened to blow a hole in government finances.

Chris Sanger, head of tax policy at Ernst & Young, said the timing could prove awkward for the Treasury. ‘Given we have seen a downturn in corporate profits, there will therefore be greater losses [to offset].’

A Treasury spokesman said the government has just received the request by the commission and is now considering its response.

Because many UK companies are yet to quantify claims, any definitive costing is yet to be established.

Cussons also expects the UK to comply with the Commission’s request, and said the Treasury will need to justify their actions.

‘It’s been far too narrowly drawn and the Commission has agreed with the complainants,’ he said.

Further Reading:

European Law: Sweet Victory