Partner Article

Budget 2014 predictions: Tax law catches up with EU court ruling

Last December we commented on HMRC losing a Supreme Court case about its failure to recognise taxpayers’ rights under European Union treaties that might cost the Exchequer some £5bn.

The Government has now published its proposals for dealing with the inadequate laws made in 2007 that tried to limit the impact.

The problem was that UK law hadn’t recognised freedoms guaranteed by EU treaties to be available to all European businesses to transact across borders. Before 1999, if a UK company received a dividend from a UK subsidiary, the income was not taxable.

If the same company received a dividend from an EU subsidiary, it was taxable. This was a real disincentive to British companies wanting to invest in other EU states and was illegal under EU treaties. The offending rules about advance corporation tax (ACT) were abolished in 1999, but lots of businesses had suffered tax illegally for years, and some of them sued HMRC to reclaim the money.

The argument took so long that the time limit for refund claims passed, and HMRC said the claims were too late. The House of Lords ruled in 2006 that this was unfair, since the companies couldn’t have known within the time limit that they could claim, so they should have extra time. The law had already been changed in 2003 to block claims made on that basis (subsequently amended in 2007), a change that was itself ruled unfair in December, over ten years later.

HMRC has now published draft laws to be included in the Finance Bill next month that correct the law from the outset, so that the time limit set in 2007 cannot apply to stop claims that tax has been charged contrary to EU law

Somewhat surprisingly, perhaps, the impact on public finances set out in the notes to the draft legislation is nil, apparently on the basis that it isn’t changing the law, it is merely putting the existing legal position as decided by the Supreme Court into the written law.

It would nevertheless be interesting to know how much HMRC is having to pay back to all the businesses affected by the previous government’s deficient attempt unfairly to block the refunds. The latest (non-HMRC) estimates suggest around £6bn.

This was posted in Bdaily's Members' News section by Baker Tilly .