The relentless drive by multinational companies for tax refunds from the Inland Revenue, due to the UK tax system falling foul of European law, reads like a who’s who of global corporate giants.
The government is facing a mammoth onslaught – and the signs are that it isn’t going to go away. As Simon Whitehead of Dorsey & Whitney, lead solicitors in many of the cases, puts it: ‘Already some 350 claims of this nature have been issued in the High Court by well over a thousand resident and non-resident companies from 300 multinational groups.’
Last week the High Court gave the go-ahead for the sixth and latest group litigation order against the country’s tax system. This relatively small claim was brought by KPMG and law firm McGrigors against the Revenue on behalf of 19 of the country’s biggest pension funds.
BT Pension Scheme leads the fight. But court papers reveal that Shell Pensions Trust, the Royal Insurance Group, the Royal Mail and the Lattice Group are all involved. Mark Whitehouse of law firm McGrigors, formerly K-Legal, said the pension trustees felt they owed it to investors to investigate the possibility of compensation.
While the total compensation of the so-called foreign income dividend GLO is likely to top £100m, it is dwarfed by both the advanced corporation tax (ACT) and loss relief GLOs.
Well over 100 company groups, including Coca Cola, BMW, Heinz, Ericsson, Volkswagon, Citibank, Compaq, Esso, BSkyB, and Nestle are listed on court papers for the ACT GLO. The original test case alone, involving Hoechst UK Ltd, argued the toss over the not so small matter of £25.25m. The figures are, quite simply, staggering.
While Hoechst eventually settled with the Revenue, and Deutsche Morgan Grenfell Group and Pirelli took over as lead companies, the figures are likely to be in the same ball park. With more than 100 companies claiming, these types of figures could potentially reach as high as £3bn. And that is disregarding the substantial amount of interest that would be claimed on top.
Worryingly for the government, the group relief case is likely to be more damaging. While there are just 59 company groups listed on the GLO court papers, including Six Continents, Weir, Portakabin, Lloyds, BT and Asda, the implications of the case could be far wider.
Papers from a High Court case at the end of May reveal that ‘a further 140 companies have made claims in respect of group loss relief which are outside the loss relief GLO. Those claims have not been brought in the High Court’.
Should Marks & Spencer prevail at the European Court of Justice early next year, as widely expected, the floodgates will open. M&S will win compensation of £30m plus interest – believed to be in the region of £10m.
The 59 companies in the GLO will then be highly likely to win their cases, and while it is difficult to put a figure on this, somewhere in the region of £3bn would not be too wide of the mark. On top of this are the 140 company groups waiting in the wings.
One source, who asked not to be named but has intimate knowledge of the cases, says the Revenue is keeping tabs on how much the current cases could end up costing. ‘I’ve heard the figure £20bn being cited,’ he says. While unsubstantiated, it is easy to see why the department finds itself dealing with figures of such magnitude.
The remaining three GLOs involve fewer companies. There are 12 companies disputing the UK’s approach to thin capitalisation rules, five of which are being treated as lead cases: Lafarge, Volvo, Caterpillar, Pepsi and IBM. No minnows there.
According to court papers, another company group in the GLO is the Bank of Ireland. Between July 1997 and March 2002, the bank issued intra-company loans worth over £1bn. Interest reached almost £170m, and it is believed that its claim alone reaches beyond £20m.
In total, 12 companies make up this GLO – again interest would also have to be paid if the claims are successful.
A franked investment income GLO, which centres around a technical argument over the payment of ACT on the distribution of dividends, is made up of 12 company groups.
Court papers reveal some of the world’s largest companies are making claims against the Revenue. ICI, GKN, BP, British American Tobacco and Aegis are all listed as being involved. One company, Degussa, has laid out the amounts of ACT paid on those dividends. Between May 1996 and April 1997 this amounted to almost £18.75m. These figures could be dwarfed by those of other groups in the same GLO.
The final GLO, which involves 21 groups, is known as the controlled foreign companies dividend dispute. The first company to make a claim under this technicality was Scottish & Newcastle, which argues that if a subsidiary had been resident in the UK it would not have been subject to ‘assessment’ charges. Those assessment charges reached well over £11m.
Anglo American, Prudential and Cadbury-Schweppes lead this particular battle. The likes of Royal Sun Alliance, J Sainsbury, AXA and Invensys are all named as claimants in court papers.
And, even more worryingly for the government, companies are joining each of the GLOs all the time.
The six current GLOs
In its simplest form, losses incurred abroad should be able to be offset against UK profits.
Test claimants: Autologic, BNP Paribas, BT, Caterpillar, Heinz, The Future Network.
Current state: Revenue appealing to House of Lords, expected in October
Advanced corporation tax
In its simplest form, payment of ACT on dividends from UK subsidiaries to EU parents contrary to EU law.
Test claimants: Deutsche Morgan Grenfell, Pirelli, NEC Semiconductors
Current state: Class 1 victory for taxpayer; Class 2 Revenue defeated twice, seeking leave to appeal to Lords; Class 3 lost by taxpayers, appeal in April 2005; Class 4 referred to ECJ
Thin cap provisions are in breach of the EC Treaty
Test claimants: IBM, Pepsi, lafarge, Volvo, Caterpillar
Current state: trial date fixed for November 2004
Controlled Foreign Companies
Dividends received by UK corporations from European companies are subject to corporation tax – illegal under EC Treaty.
Test claimants: Anglo-American, Cadbury Schweppes, Prudential
Current state: trial date fixed for January 2005
Franked Investment Income
Payment of ACT by UK company groups on dividends from EU-based members of group contrary to EU law.
Test claimants: British American Tobacco, Aegis
Current state: with ECJ
Foreign Income Dividends
Tax relief should have been available on dividends received on overseas investments between 1994 and 1997
Test claimants: BT Pension Scheme
Current state: permission for GLO granted.
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