Vodafone's tax case before the special commissioners may provide some comfort for finance directors, tax advisers have indicated, as the turmoil over the UK's controlled foreign companies rules deepens.

The company has been seeking to close down an enquiry by HM Revenue & Customs over a Luxembourg subsidiary, with the tax bill at stake running to almost £2.5bn, according to Vodafone' estimates.

In the latest hearing on the case, the special commissioners considered whether the matter should be referred to the European Court of Justice. But the special commissioners ruled by a casting vote that a previous decision on Cadbury Schweppes should be 'read down' into the Vodafone case, without complicating matters further by going again to the ECJ.

'The decision should provide reassurance [for FDs]. It said Cadbury Schweppes is the be-all and end-all, and the question is 'do you have economic substance',' said Chris Morgan, an international tax expert at KPMG.

The CFC rules are thus surviving challenges to their compatibility with EU rules, but subject to a crucial proviso that UK companies can use to defend their positions.

The ECJ ruled in Cadbury Schweppes' case that as long as there was genuine economic substance in an offshore subsidiary, it could not be hit by the UK's CFC rules.

'Such a tax measure must not be applied where it is proven, on the basis of objective factors which are ascertainable by third parties, that despite the existence of tax motives that controlled company is actually established in the host member state and carries on genuine economic activities there,' the court said.

The interest in big cases like Vodafone's and Cadbury Schweppes is to determine what that may mean in UK law. That will be decided in hearings in both cases on the facts, one in relation to Vodafone's Luxembourg subsidiary and the other over Cadbury's Irish subsidiary.

There is also the added complication that a group litigation order is also going to Europe on the issue. It concerns several kinds of structures, it is thought, so that may not disrupt the fundamentals of the Cadbury judgment itself.

The CFC rules are there to prevent companies from placing income-producing assets outside the UK. If a company is treated as a CFC, its income becomes part of UK taxable income.

The government is currently trying to revamp the rules to take account of the challenges to them and also to tighten up the rules.

It is particularly exercised by the idea of companies setting up Treasury functions or intellectual property abroad, and having the income taxed at lower foreign rates.

Morgan says the government is looking at rules to bring all offshore 'mobile' income into the UK tax net, meaning overseas intellectual property subsidiaries overseas being affected.

That looks certain to create huge complications for companies, as the government effectively looks to tax certain types of income on a worldwide basis.

'FDs would have to identify the particular type of income in every subsidiary, tax it in the UK and work out what foreign credits attach to that income,' Morgan said.

The rules have been widely criticised by advisers and by companies, and are currently under review.

COMPANY REPORTS

Bonus of £5m for Sports Direct FD

The finance director of battered sports retailer Sports Direct has been given a £5m bonus for his 'important contribution to the development of the company'. Bob Mellors received the bonus despite a tumultuous and fractious relationship with investors and analysts, and a plummeting share price that has more than halved in Sports Direct's first five months as a listed company. Half of the £5m has been paid already and the rest will be paid next spring. Mellor's £150,000 salary is relatively small compared with that of other FTSE FDs. He also has no shares in the company and does not receive any company pension benefits.

Payback time for Securitas

Securitas has agreed to pay back about £15m to the Bank of England after uncovering discrepancies at its UK cash handling unit, Loomis Cash Management. Loomis, which is operated as a joint venture with HSBC and Barclays, has set aside the £15m provision after discovering that it had been overstating the value of notes held in its sorting process 'for some time'. The charge will cover lost interest and the cost of the Bank's investigation, which is being led by KPMG.

Pension deficits cuts

FTSE 100 companies have dramatically reduced their pension scheme deficits over the past 12 months, to post a surplus of £12bn. The latest Accounting For Pensions survey by Lane Clark & Peacock reveals that the FTSE 100 turned around a £36bn deficit from 2006 into a surplus just a year later. The companies achieved the turnaround through a combination of record contributions into their schemes Ð of £13bn, and favourable investment returns. The survey also found that each additional year of life expectancy factored into pension calculations costs the schemes a total of

£12bn. Bob Scott, partner at LCP, said: 'It is encouraging to see UK pension schemes of FTSE 100 companies report a surplus after so many years in the red.

Aga cold on bills

Stove-maker Aga is the slowest FTSE 250 company to pay its bills, taking an average of 81 days to pay up according to a survey by the Institute of Credit Management. The survey found that the average time taken by a FTSE 250 business to pay its bill is 27 days. The institute warned that some larger companies were 'deliberately manipulating' credit terms so although they appeared to pay on time, their smaller suppliers were actually waiting longer to receive payment.

Satisfying reward

Companies are increasingly rewarding top executives on the basis of non-financial measures such as customer satisfaction, employee engagement and environmental performance,

PricewaterhouseCoopers has said. There has been a dramatic growth in the number of bonus packages offered on a combination of financial, non-financial and individual measures, the firm said. According to the Big Four firm, some 13% of packages were based on such criteria in 2005/06, and 31% in 2006/07. Duncan Brown of PwC said: 'We are seeing a continuing shift towards variable pay in UK plcs and a growing emphasis on long-term performance when determining executive pay.'

Backdating conviction

The first guilty verdict in an options backdating case has been handed down by a jury in a San Francisco court this week. The conviction of Gregory Reyes, 44, former chief executive of Brocade Communications Systems, on all ten counts in the government's first criminal prosecution for options backdating could herald the start of a new wave of convictions. Some 170 others have been charged and are being investigated by the US securities regulator on similar counts.