HMRC could face damages over 'thin cap' rules

A High Court ruling in a case against the taxman by global businesses including Siemans, Volvo and IBM, could see HM Revenue & Customs lose hundreds of millions of pounds in damages, leading accountants have said.

The ruling is thought to be among the few – possibly even the first – corporation tax cases where HMRC is held as potentially liable in damages. This would mean that HMRC may have to compensate litigants in advisers’ fees as well as paying back taxes.

Known as the Thin Cap Group Litigation Order, the case saw companies claim damages and restitution for the extra corporation tax paid as a result of interest charged on inter-company loans.

Peter Cussons, head of EU direct tax group at PricewaterhouseCoopers, commented, “A claim for restitution simply rules that the additional tax paid is unlawful, and HMRC would have to pay it back.

“However a claim for damages is a more far-reaching remedy. It could potentially include interest on tax paid, foreign tax paid and legal fees.”

The ruling applies only to tax charged on interest paid before the rules were changed on 1 April 2004.

There is some slight consolation for the taxman though: the High Court judge ruled that the ruling would only apply to transactions that occurred before that date, but after another key court ruling in December 2002.

However Chris Morgan, head of international corporate tax at KPMG, warned: “The six-year time-limit rule for claiming for damages or restitution still applies. Anyone who has not made a claim before December 2008 has lost their right to claim. There might be a possibility to make an ‘error or mistake’ claim through prior years’ tax returns, but these would be subject to EU rules.”

A spokesperson for HMRC said they were considering the decision before deciding whether or not to appeal.

The thin cap conflict revolves around a disagreement over tax charged on the interest made from inter-company loans.

Problems arose when loans came from EU-based parent companies to a UK subsidiary. HMRC was said to have not treated EU parent companies fairly.