Direct tax rule to face legal challenge
The government has introduced legislation to protect direct tax revenues which is almost certainly illegal under European law, according to experts.
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Paymaster general, Dawn Primarolo, announced today that businesses would only be able to claim back tax that was overpaid because of a mistake of law for a maximum of six years in arrears.
While perfectly entitled to do so, European case law stipulates that any changes to such regimes must include a transitionary period, with six months being the norm. However, the announcement from Primarolo was to take effect immediately.
It refers to a High Court case lost to Deutsche Morgan Grenfell in July, that meant businesses could start court proceedings for reclaiming overpaid advanced corporation tax with no backdating limit.
The government has now taken away that right, with no warning. Chris Morgan, head of the European tax group at Big Four firm KPMG, described the government stance as ‘disappointing’.
‘It was to be expected but will be ineffective,’ he said. ‘Because it is aimed at all tax cases, it is clearly targeted at the EU situation.’
Simon Whitehead, a partner at law firm Dorsey & Whitney, said there is ‘no question that the legislation will be challenged’.
A spokesman for the Inland Revenue said: ‘We have considered the proposed change very carefully and our firm legal advice is that it conforms with both European law and Human Rights law.’
He also denied that the move was an attempt to put a further hurdle in front of businesses challenging the UK tax system at the European Court of Justice.