Treasury steels itself for massive tax hit from ECJ

The UK is preparing for a crippling hit to tax revenues, as the European Court of Justice prepares to hand down a decision that experts believe will blow a multibillion-pound hole in the government’s finances.

The ECJ will announce its decision on the franked investment income GLO, and it is anticipated that the court will follow the April opinion of the advocate general, which favoured the taxpayers. It is anticipated that the challenge could cost the government £7bn, and force the Treasury to make changes to the tax system in order to protect tax revenues in the future.

The GLO challenges the tax treatment of dividends in the UK. Under the current regime no tax is charged on dividends paid between British companies, whereas dividends paid from a foreign subsidiary do incur tax. The case argues that this is discriminatory under the EC Treaty.

Jonathan Bridges from KPMG’s EU law group said it was likely the ECJ would follow the opinion of the advocate general, despite recent decisions to the contrary.

‘There have been a few surprises from the ECJ, most notably on the booze cruise and IRAP cases, but the differences in tax treatment of UK dividends and foreign dividends are very clear and ECJ should follow the advocate general,’ said Bridges.

Jason Lester, a partner in international tax services at Ernst & Young, said if the ECJ decision went against the UK taxman, a massive revamp of the tax system would be essential.

‘If you look at the Cadbury Schweppes ruling and the FII case, you could have a situation where a business could move a subsidiary offshore, repatriate a dividend tax free and still attract interest relief. For the government it is like staring down a three-barrelled gun,’ said Lester.