GLOs: Much ado about nothing?

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

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

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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