Analysis: Will the UK scrap the tax cap?

Brussels has decided UK tax policy breaks its laws. The European Commission
has laid down an ultimatum for the UK to scrap a six-year limit for tax
reimbursements to taxpayers.

The EC wants the cap removed on the grounds that it makes it “almost
impossible” for taxpayers to exercise their rights to repayments.

Any tardiness in scrapping the limit would open up the UK to a threat of the
EC referring the issue to the European Court of Justice.

But what is at stake for the UK? What areas of tax are most affected? Is it
likely that the Treasury will take on the European Commission in the courts, and
does it have a chance of winning?

The EC’s main gripe is that it may take more than six years to reach a
decision on long-running tax issues, meaning that a ruling handed down outside
this period does not benefit British taxpayers.

Clearly, scrapping the legislation would mean UK taxpayers could claim
reimbursements going further back in time, raising the government’s potential

The stakes are potentially high for the UK because the issue particularly
affects direct taxation – an area that includes income tax, corporation tax,
capital gains tax and inheritance tax – disputes over these issues can take a
very long time to resolve.

But the word “potentially” is important because the EC has not accused the
government of a blanket breach of European law in levying these taxes. Even
though the taxman brings in hundreds of billions in tax revenues it takes great
care not to ride roughshod over taxpayers’ rights.

Despite the government not making a habit of infringing taxpayers’ rights,
there are key exceptions which have led to landmark cases. It is these that will
give the government a headache when deciding whether or not to fight this

If they decline to contest it, then cases such as the Thin Cap group
litigation order – a fight regarding overpaid corporation tax – could become
even more costly for the taxman than the hundreds of millions of pounds advisers
have estimated.

This is because the six-year cap for claiming reimbursements would evaporate.
Advisers have said the six-year cap was the one barrier to the taxman suffering
higher costs in the dispute.

Leaving the commission’s ruling uncontested would therefore mean the UK
government will have additional repayments to make at a time when it can
ill-afford for money to be leaching out of the UK’s coffers.

If it decides to contest the EC’s ultimatum, the government has another
problem: the courts have already decided in another dispute that a three-year
cap was introduced by government without giving companies time to prepare.

This preparation time is known as a transitional period and the three-year
cap was judged to be incompatible with European Union law because of its

The EU does not like the fact the six-year limit also lacks a transitional
period, so taking the previous loss as a precedent, the chances of the EU
finding in favour of the taxman are low.

The government also failed to consult on the six-year cap, and these points
taken together led one leading tax adviser to say the government didn’t have “a
hope in hell” of winning.

Of course, dragging the case through the courts also gives it a higher
profile and therefore alerts more people who may be in line for a reimbursement
that the issue is being considered, raising the potential costs even higher for
the government.

The UK now has until the end of November to make its decision to repeal the
legislation, known by tax advisers as S107, before the case is automatically
referred to the EU’s Court of Justice.

“Virtually all tax advisers think [S107] is contrary to EU law,” said Bill
Dodwell head of tax policy at Deloitte. “We think that the UK won’t be able to
beat the case off [in the courts].”

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