The Inland Revenue has surrendered to the European Court of Justice in a case that experts warn will lead to European tax harmonisation ‘by the back door’.
In a move that will save UK-based companies of European parents millions of pounds in corporation tax, Revenue chiefs last week conceded that group relief rules for UK companies contravened European law.
The decision follows the court’s ruling in the ICI v Colmer case last year that UK group relief rules restrict the right of UK companies to establish subsidiaries in other EU countries, and therefore violate the non-discrimination principles of the EU Treaty.
Tax experts said the case was one of an ‘avalanche’ of similar cases going through the European courts arising from the tax laws of EU countries said to be breaking European law.
KPMG international tax director David Evans said: ‘The ECJ is bringing in tax harmonisation by the back door. It is bulldozing through the restrictions that prevent the single market from operating properly. Tax authorities are slow to accept the importance of the Maastricht Treaty in tax law, and it is only when decisions like ICI v Colmer come to light that they accept they must change their legislation.’
He argued that ECJ decisions were generally good for companies, as they were generally brought by taxpayers rather than tax authorities.
Other cases pending in the European courts include one involving German chemical giant Hoechst, which challenges the fundamentals of the UK’s advance corporation tax system. Tax experts speculate that the case contributed to the UK’s decision to abolish ACT, and say it could lead to the government being forced to repay millions of pounds in ACT already paid by companies.
Prior to last week’s climbdown by the Revenue, all companies involved had to be UK resident to claim group relief.
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