Business View: The famous five tests will be casualties in the Treasury's war with Europe

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The Independent Online

It wasn't in the shop window of the Chancellor's Budget. But if you looked in press notice six, paragraph 12, in a section about corporate taxes, it was there, bold as brass.

It wasn't in the shop window of the Chancellor's Budget. But if you looked in press notice six, paragraph 12, in a section about corporate taxes, it was there, bold as brass.

"The Government is determined to protect the corporation tax system against legal challenges under European law, particularly where these challenges have the potential to undermine international agreements. The continuing consultation on corporation tax reform will provide the opportunity for the Government to discuss with business the legislative options to ensure that the UK regime remains robust."

In other words: "We, the UK Treasury, are sick of being beaten at the European Court of Justice by the likes of Hoechst and Lankhorst and forced to dismantle parts of our taxation policy. So we're telling you foreign Johnnies that we're going to bring in some jolly stiff new measures that you won't like, and we'll make sure those Belgian bureaucrats and Strasbourg lawyers won't be able to do anything about it."

Or to be even more blunt: "Get your European tanks off my British lawn."

The Treasury and its pet Rottweiler, the Inland Revenue, have lost twice at the ECJ in the last 12 months. Both cases involved UK subsidiaries of foreign companies and both could lose the Exchequer hundreds of millions of pounds as other companies cash in to claim back tax they incorrectly paid. Other cases dealing with write-offs from failed European subsidiaries of UK companies and holding companies based in tax shelters are on the cards. Indeed, accountants Ernst & Young are warning that: "The domino effect of these cases gives an impetus to companies to challenge more and more aspects of UK tax law."

And it goes further than that. The European Commissioner in charge of tax issues, Frits Bolkestein, is angling for greater tax harmonisation across Europe – and this includes the UK, even though we're outside the euro. Plus his mate in charge of competition, Mario Monti, believes different tax rates across Europe are "unfair competition", so he may take action if certain countries are using their tax policies to help businesses unfairly.

And this is rather what Gordon Brown is hoping to do. Not unfairly of course, but to use tax policy to help business in Britain all the same. One of the big competition issues is corporate tax – the UK does not want to lose out as a place for big businesses to locate. Its main rival in this is the US, and Gordon does not want his hands tied by Europe when trying to bring well-paid jobs to the UK.

In one sense this tough talk from the Treasury is welcome. It is a recognition that ad hoc legislation through the courts is happening as much in tax law as it is with privacy rules (as the judge in the Catherine Zeta-Jones trial noted on Friday). And letting the courts take a lead is not only laborious but also expensive and sure to lead to massive anomalies.

The flip side, though, is that here is the Treasury's fundamental euroscepticism showing through. Mr Brown's closest aid, Ed Balls, is lukewarm on the euro at best. And many in Whitehall are irritated by the inability of Europe to act cohesively, and the propensity of countries like France to get away with breaches of the rules when the UK either plays by the book or is punished for departing from the straight and narrow.

Taking a tough line on Europe does not bode well for the famous five tests for euro entry. Mr Brown has put the assessment back to the beginning of June. There cannot be any economic reason for this. If we meet the five conditions today, we won't fail to meet them in seven weeks' time.

More likely the Chancellor has not been able to get George Bush out of the way for long enough to sit down with Tony Blair and wring out of him enough concessions on other things to allow the five tests to be fiddled in favour of the euro. Foundation hospitals, local elections, a Cabinet reshuffle and Jacques Chirac's slippery nature have more to do with this euro decision than economics. Don't bet on a referendum in the near future.