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In the main culled from Financial Director

In his annual Budget appearance before the Treasury Select Committee, Gordon Brown emphasized the government would be resolute in its attempts to stop companies using European law to eat into government revenues.
‘The UK will defend vigorously any challenge to UK tax law,’ he said. ‘We will take whatever action is necessary to remove uncertainty.’

The chancellor’s statement comes in the midst of an onslaught of claims against the Inland Revenue from large multi-national corporations.

Big corporations, including Marks & Spencer, Coca-Cola and IBM are involved in moves that could with interest potentially cost the Treasurer £20bn.
Banding around such colossal figures defies any relevance to the ordinary UK tax payer, but to put it into context that sum equates to almost £670 for every UK taxpayer, or nearly £340 for every man, woman and child in the country. It also exceeds total council tax receipts for 2003-04.

The sum is arrived at by combining the potential refunds from litigation or group litigation orders (GLOs)

The cases involve challenges to six separate areas of the corporate tax regime and all contest that they contravene EU law.

The cases are brought under article 43 of the EC treaty which prohibits member states hindering an EU national in one state establishing a business in another member state as they like and in the forms they like.

The Institute of Policy Studies, carried out detailed research on the claims and concluded that the ‘cost of those cases is in the region of £10bn’ and that if all other avenues were pursued the loss to the Exchequer could be a further £8bn annually’.

But many more company groups have since jumped on the GLO bandwagon.

The High Court gave the go-ahead for the sixth and latest group litigation order against the country’s tax system. This claim was brought against the Revenue on behalf of 19 of the country’s biggest pension funds. BT Pension Scheme leads the fight, but court papers reveal that Shell Pensions Trust, the Royal Insurance Group, the Royal Mail and the Lattice Group are all involved.

While the total compensation of the so-called foreign income dividend GLO is likely to top £100m, it is dwarfed by both the advanced corporation tax (ACT) and loss relief GLOs.

Well over 100 company groups, including Coca Cola, BMW, Heinz, Ericsson, Volkswagon, Citibank, Compaq, Esso, BSkyB, and Nestle are listed on court papers for the ACT (GLO).

However the (group relief case) is likely to be more damaging. While there are just 59 company groups listed on the GLO, court papers, including Six Continents, Weir, Portakabin, Lloyds, BT and Asda, the implications of the case could be far wider.
Papers from a High Court case reveal that a further 140 companies have made claims in respect of group loss relief which are outside the loss relief GLO. Those claims have not been brought in the High Court’.

The six current (group litigation order) GLO

Loss Relief; In its simplest form, losses incurred abroad should be able to be offset against UK profits.
Test claimants: Autologic, BNP Paribas, BT, Caterpillar, Heinz, The Future Network.

Advanced corporation tax
In its simplest form, payment of ACT on dividends from UK subsidiaries to EU parents contrary to EU law. Test claimants: Deutsche Morgan Grenfell, Pirelli, NEC Semiconductors

Thin capitalisation
Thin cap provisions are in breach of the EC Treaty Test claimants: IBM, Pepsi, lafarge, Volvo, Caterpillar

Controlled Foreign Companies
Dividends received by UK corporations from European companies are subject to corporation tax - illegal under EC Treaty. Test claimants: Anglo-American, Cadbury Schweppes, Prudential. Royal Sun Alliance, J Sainsbury, AXA and Invensys are all named as claimants in court papers.

Franked Investment Income
Payment of ACT by UK company groups on dividends from EU-based members of group contrary to EU law. Test claimants: British American Tobacco, Aegis

Foreign Income Dividends
Tax relief should have been available on dividends received on overseas investments between 1994 and 1997 Test claimants: BT Pension Scheme.

There is no doubt the European Court of Justice is gaining more and more influence over the tax affairs of our country, and these cases threaten to introduce effective direct tax harmonisation by the back door.

Not only have all recent ECJ corporation tax decisions gone in the taxpayer’s favour but the volume of decisions has been steadily increasing.

From the occasional case each decade we have more than 20 decisions or references since 2000. Even the waiting period to get before the ECJ with a corporation tax question is declining.

The ECJ has taken the freedom of establishment article as the main battleground, extending it in ways which are bringing down principle aspects of corporation tax common to most developed economies and which have been with us since at least the 1980s.

It is only a matter of time before the ECJ determines whether the denial of cross-border loss relief is illegal.

The Lankhorst-Hohorst case, among others, showed it is illegal for repayments of loan capital to company members in other countries to be recharacterised as distributions of profits.

On top of this there is also the challenge to VAT repayments, following the governments defeat by Marks & Spencer over biscuits and other foodstuffs. The European Court of Justice ruled in favour of the Marks & Spencer in its long running dispute over the repayment of VAT on biscuits, tea cakes, bottled water and gift vouchers. It is estimated Marks & Spencer could hope to claim back VAT totalling between £8m and £9m, including interest. This has opened the way for multi-million pound claims by a wide range of businesses, both retail and non-retail, to claim back VAT dating back to its inception in 1973. ‘These claims could be in excess of £100m.

The Revenue is fighting back by rejecting the GLO claims on the grounds that the UK group relief system - for offsetting profits and losses of connected companies - only applies to parents and subsidiaries that are both in the UK, and imposing new legislation rushed in by the UK to counter the burgeoning number of cases.

But The ECJ is concentrating on Article 43 of the EC Treaty which relates to freedom of establishment, and stipulates that member states have to operate on a level playing field, and domestic companies should not get any preferential treatment over foreign companies. The ECJ ruling confirmed that a parent company that invests in a foreign subsidiary cannot be treated less favourably than one that invests in a domestic subsidiary.

The bottom line is that Gordon Brown has produced a budget for the United Kingdom, delivery of which is beyond his capabilities, unless the government is prepared to break their own agreements with the EU, and to undermine their own assertions that We control tax and social security
and Primacy simply means everybody sticking to the rules that we agree at European level.

Where we have not agreed to act together at European level, there is no EU primacy.

Without primacy of EU law, Governments could use national laws to get around common trade rules and standards. Without primacy, we could not guarantee a level playing field for British business in Europe or common standards for British consumers.

As the FOC has said
EU law protects British business and consumers. Britain agrees rules with other European countries covering trade, access to markets and common standards. We need those rules to enjoy the benefits of Europe’s single market of 450 million people, the largest in the world. They create one rulebook for 25 countries to follow. These rules aren’t inflicted on us – we help write them. ‘Primacy’ of European law means nations can’t use domestic rules as an excuse to get around those promises.

Primacy simply means everybody sticking to the rules that we agree at European level. Where we have not agreed to act together at European level, there is no EU primacy. Without primacy of EU law, Governments could use national laws to get around common trade rules and standards. Without primacy, we could not guarantee a level playing field for British business in Europe or common standards for British consumers. Without primacy, we could not have turned to the European Court of Justice to overturn the French ban on British beef.

Primacy of European Law is not new. It was already well established as a central principle of the single market well before the UK joined the EEC in 1973 and has been reflected in UK law ever since.

No international organisation could function if domestic law undermined treaties. Whether it’s the WTO, the UN, NATO or the EU, no international organisation could function if its members used national laws to get around international commitments. Once made, agreements with other nations must be kept in good faith and domestic law must respect them.

The European Court of Justice defends those rules.

The ECJ decides whether countries have broken the rules. It interprets the laws agreed by the national Governments, reaches judgements and can impose penalties. In recent years the Court has reached verdicts including upholding bathing water rules and penalising toxic waste dumping.”

According to this interpretation Gordon Brown is attempting to use domestic rules to get around promises, which are not inflicted on us, rules that we help write. And to ignore the concept that ‘Primacy’ of European law means nations can’t use domestic rules as an excuse to get around those promises. Either that or the ECJ is using a clause which was just waived through to extend its remit imposes tax harmonisation.