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Budget '97: Problems ahead as legal wrangles start

Utility companies which do not mount a legal challenge against the windfall tax, cannot delay paying the levy on the grounds that other groups may be fighting the policy in the courts, according to legal advice received by one large multi-utility.

The company, which did not want to be identified, has already decided it will almost certainly not challenge the legality of the tax and was told by a leading tax lawyer that it would have to pay the levy whether or not other groups make a legal challenge.

The advice has emerged as the chances of serious court battle against the windfall tax increased after British Telecom made an unexpected and unprecedented public outburst.

Some electricity and water companies had hoped they may be able to defer payment of the tax pending BT's court battle in the UK or, more probably, in Europe.

But the multi-utility was told it could only avoid handing the money across if it joined any BT action.

In reality, as BT's interest in legal challenges has grown, the attraction of the move for the electricity and water groups has dimmed. In February Labour attempted to take the heat out of the debate with a legal opinion by Michael Beloff QC.

It argued that the companies would have no chance of fighting the policy through the UK courts.

"It is a fundamental principle of domestic law that Parliament is sovereign; it may make or unmake any law whatsoever." Yet behind the scenes the legality of the tax was giving the party cause for concern.

City lawyers had shifted their attention to an appeal through the European Commission. They suggested the tax could unfairly discriminate between different EU nationalities, for example in the case of Northumbrian Water, which is now owned by Lyonnaise des Eaux of France.

However, sources within DG15, the Commission arm responsible for the single market, predicted national governments would still have the final say. "From our point of view it's a UK matter," said the source.

The most hopeful area of attack for the utilities remained a challenge to the windfall tax on competition grounds, using the argument that the tax amounts to state aid in reverse, by giving rival companies an advantage.

Karel van Miert, the Competition Commissioner, has already indicated that he may have to examine this case closely.

BT claimed the windfall levy amounted to a subsidy for its main UK competitor, Mercury, which would not be included in the levy.

Even if Mr Van Miert sought to hold up the windfall tax, he cannot act in isolation.

Another EC source said: "If there was a state aid issue the Commission would have to look at it. But the final decision would be taken by the Commission as a whole, so it would be a collegiate matter."