Vodafone licks lips at Cadbury judgement

Amid the continuing fallout from the controlled foreign companies cases going through the European courts, one case will be worrying the government more than any other: that of Vodafone.

It will concern HMRC because, where the Cadbury case was worth £8m, Vodafone’s is worth almost £2bn, according to its filings.

Vodafone has been admirably open about its contest with the taxman over its Luxembourg subsidiary, VIL. The subsidiary appears to have been a vehicle for managing Vodafone’s takeover, six years ago, of German mobile phone company Mannesmann in a tax-effective way, according to court documents.

On the face of it, Vodafone’s legal argument has suffered a blow as a result of recent judgments on controlled foreign companies (CFCs). The company had claimed that the rules were contrary to freedom of establishment, and, since that was the case, it did not even need to respond to the taxman.

But the European Court of Justice’s judgement in the Cadbury case made clear that the court did not regard the UK rules as breaking the EC treaty per se, although it still left that open in part.

In any case, Vodafone has always said it has further arguments, which must explain why chairman Arun Sarin is so bullish on the issue.

Speaking at a conference in New York, Sarin said he was ‘feeling good’ about Vodafone’s chances after the Cadbury case.

‘Obviously, the Cadbury case is very helpful for the Vodafone case, which will be heard next year. We are feeling good about what might happen with us next year in this particular regard,’ Sarin said.

Why the case is so helpful to Vodafone is less obvious to outsiders, perhaps, than to Sarin, but investors will welcome his confidence.

Vodafone’s disclosure of a potential £5bn of liabilities and weaker than expected results sent the company’s share price plunging by 10% on the day it made its disclosure.

The tax authorities, Sarin, Vodafone finance director Andy Halford and investors with a stake in the company could face a few more jittery days on the path to resolving the company’s mammoth tax battle.