ECJ ruling could cost taxman billions

Nerves will be frayed at the Treasury this morning with less than 24 hours to
go before a landmark tax ruling is expected from the European Court of Justice.

The ECJ decision, expected at about 8.30am tomorrow, could lead to claims
against the exchequer for billions of pounds in tax wrongly paid, and force HM
Revenue & Customs to rewrite UK company tax law.

The case – one of six group litigation orders or GLOs, brought against the UK
government and aimed at claiming back billions in tax – concerns whether or not
companies can claim back losses incurred in EU subsidiaries against UK tax, as
they would be able to with UK subsidiaries.

M&S is trying to claim back about £30m against its UK liabilities for
losses incurred in France in particular.

The European Court of Justice has been considering the case since April of
this year and a decision had been expected in October, leading many to speculate
that the court was minded to either overturn the advocate general’s view on the
case, or was at least grappling with some of the more difficult issues raised.

The advocate general had argued that losses might not be claimable if they
could be claimed in the country they were incurred in, or had been claimed
elsewhere, although there remains some uncertainty on what was meant by the
opinion.

Lawyers have predicted that a decision in favour of M&S could provoke
even more claims for the group reliefs.

The Treasury stands to lose further funds if a case led by Cadbury Schweppes,
which begins tomorrow in the ECJ, is successful. Cadbury claims the UK’s
controlled foreign company legislation, which penalises companies that take
advantage of low tax in other EU countries, infringes EU law.

Bill Dodwell, tax partner at Deloitte said the court could rule in four
principal ways over the M&S case:

1. UK law is acceptable – and M&S cannot claim relief;
2. UK law does not conform with European law – and M&S is entitled to use
its overseas losses against UK profits, without restriction;
3. UK law does not conform with European law but double dipping losses is not
acceptable. Since under French, German and Spanish law losses can be carried
forward in the overseas companies, M&S cannot claim UK tax relief. This
could be a real pyrrhic victory;
4. UK law does not conform with European law and M&S can get the benefit of
its overseas losses. However, a temporal restriction should be introduced to
prevent others succeeding in their claims and allow the UK to change its law.

‘There are several variants of these possibilities,’ said Dodwell. ‘It’s
important to note that variants two and four will inevitably result in major
changes to UK law.

‘The changes would be needed to limit the huge cost of giving UK companies
tax relief in the UK for the losses of non-UK companies. The possibilities could
include withdrawing group relief to restricting interest deductions.’