The group litigation orders – challenges to the UK tax system made through the European Courts – were initially painted as taxation’s version of the apocalypse.

The cases, which challenged UK rules for foreign company dividends, group loss relief and controlled foreign companies, were expected to blow massive holes in the Treasury’s tax revenues, wiping out as much as £20bn in tax takings according to estimates made at the start of the GLOs.

But seven years since Marks & Spencer first made a claim for loss relief under EU tax rules, the fears of what the tabloids might call ‘tax chaos’ have failed to materialise.

Damage inflicted in the original ACT litigation in 2001 has been restricted by victories for HM Revenue & Customs in later classes of the group litigation that followed.

Expected defeats in the Loss Relief, Franked Investment Income, Controlled Foreign Companies and Thin Capitalisation GLOs have either not materialised or been drastically circumscribed by the ECJ’s judgments.

With the largest GLOs now out the way, advisers, lawyers and government officials have all acknowledged that the impact of the litigation on government coffers has been far less dramatic than originally feared.

So why is it that the massive tax losses have not materialised? Did HM Revenue & Customs and the Treasury fight their corner so well that the GLOs all flopped miserably? Were the massive numbers floating about overblown in the first place?

One of those close to the cases believes that over-inflated estimates are one of the reasons why the large tax revenue cuts were never realised.

‘I know a number of these cases and there was nothing to explain where the massive numbers were coming from. Before a big ECJ decision the Treasury would release massive numbers about the losses an adverse decision would cause, but if they lost those numbers would suddenly be far smaller than estimated before a judgment,’ the source said.

There may be something to this line of argument, but the reluctance of the government to disclose estimates of the costs of the GLOs suggests that the amounts at stake would have been substantial enough to cause political problems.

Over the last 18 months there have been two freedom of information requests asking for details of the potential costs of the GLOs to the government – one, by freelance journalist Richard Brooks to HMRC and one, by Accountancy Age, to the Treasury. Both were turned down.

The request to the Treasury was declined, with the reason given that an estimate of the GLO impact would be too difficult and expensive to calculate because more than ‘17,000 documents were identified that potentially fell within the scope of the request’.

It is perhaps HMRC’s reasons for declining to disclose estimates that are the most illuminating. The taxman gave four reasons for rejecting the request. The most striking of these was that disclosing the GLO estimates would jeopardise the UK’s position within the EU.

The government said the figures would ‘lead to a press campaign against the UK involvement in Europe and the reach of the European Courts’.

Other reasons given were that disclosure would ‘call into question the government’s adherence to its own fiscal rules, which could increase the cost of borrowing’, cause speculation that taxes would have to be raised and undermine confidence in the government to manage the economy, causing ‘political instability’.

Alienation from Europe, political instability, economic slowdown and a collapse of fiscal rules – it’s a heady cocktail of disaster scenarios. With the government still refusing to disclose the estimates, it is also a sure indication that the sums at stake must have been very substantial.

This probably explains the government’s approach to its defence against the GLOs. HMRC and the Treasury were very successful at dragging cases out for as long as they possibly could and pursuing every line of possible argument and fighting every detail in each case.

‘It has been a long slog and I was surprised at how long the government was able to string cases out. Some of the results of the ECJ decisions were surprising because the government ran every argument, good or bad, in its defence,’ a source involved with the cases said.

Peter Cussons, international tax partner at PricewaterhouseCoopers, however, said a shift in the mood of the ECJ itself probably had as much to do with the lower-than-expected losses as government’s dogged defence.

‘I have always felt that there was a shift in the stance of the court through the course of the GLOs. Since the M&S win in 2005 the ECJ seems to have undergone a shift in character that favoured the member states and I think that is the main reason why the losses have not been as substantial,’ Cussons said.

So have the GLOs ultimately finished up by being nothing other than a storm in the proverbial teacup, now that the biggest cases have finished and had little impact on tax revenues? Have the litigants failed to achieve the rewards they were pursuing?

Cussons argued against this conclusion: ‘The predictions of Armageddon have not wholly materialised, but there have been major ructions with the proposed changes to the taxation of foreign company profits so I think we are sitting at deuce,’ Cussons said.

‘Following the Cadbury Schweppes CFC case and the FII case we are now discussing the biggest changes to taxation for 23 years. The changes may not have been as expensive as first thought, but they have been significant.’

The six main GLOs

Group Loss Relief:
Claimants: Autologic, BNP Paribas, BT, Caterpillar, Heinz, The Future Network.

Advanced corporation tax:
Claimants: Deutsche Morgan Grenfell, Pirelli, NEC Semiconductors

Thin capitalisation
Claimants: IBM, Pepsi, Lafarge, Volvo, Caterpillar

Controlled Foreign Companies
Claimants: Anglo-American, Cadbury Schweppes, Prudential

Franked Investment Income
Claimants: British American Tobacco, Aegis

Foreign Income Dividends
Claimants: BT Pension Scheme

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