Inland Revenue faces huge claims after Lords ruling

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The Independent Online

The Government was left facing a bill of several billion pounds yesterday, after the House of Lords ruled in favour of Deutsche Bank in a landmark tax case which has dragged on for more than five years.

The Law Lords ruled four to one in favour of the German bank, which was attempting to reclaim millions of pounds worth of Advanced Corporation Tax (ACT) it had paid in error during the 1990s. The ruling is likely to affect dozens of companies with similar claims. During its defence, HM Revenue & Customs admitted that a loss would cost the Treasury billions of pounds.

The case related to the way in which the Government charged ACT - a tax levied on dividends paid out from UK companies, and which was eventually abolished in 1999. The law stated that payments between UK subsidiaries and UK parents would be exempt from the tax. Deutsche Bank's UK subsidiary was not granted the exemption when it paid dividends to its parent company, as it was based in Germany.

In 2001, another German company, Hoechst, won a victory against the UK government in the European courts, proving that it was unfair for UK companies to be forced to pay ACT simply because their parent was based elsewhere in the EU.

After the Hoechst decision Deutsche Bank proceeded to take the UK Government to court. The Government claimed that it did not have to pay up for at least one of the German bank's three claims, as it was made more than six years after the tax was paid. However, Deutsche argued that the six-year time-limit should only apply from the time it became apparent that the tax had been paid in error - i.e. from the date of the Hoechst ruling in 2001.

Having won its case in the High Court, it lost in the Court of Appeal, before reclaiming victory yesterday in the House of Lords.

Passing down his judgment, Lord Walker said: "Parliament has enacted that where there is an action for relief from the consequences of a mistake, time should not run so long as the mistake remains undiscovered." Another case is to be heard by the Lords next week to determine how the interest on the wrongly paid tax should be calculated.

Fiona Walkinshaw, the head of tax litigation at Reynolds Porter Chamberlain, said: "The House of Lords has confirmed that the principles of money paid through a 'mistake of law' apply equally in claims against the Revenue as they do against claims against private persons and other public bodies. The Revenue had tried to argue that somehow tax is different and that they should be given special treatment. The House of Lords has firmly rejected this. The Revenue is likely to face a hefty bill to settle these claims."

Bill Dodwell, a tax partner at accountants Deloitte, added: "The decision clears up some of the confusion on time limits but it remains to be seen what evidence will be needed for companies to prove that there has been 'a mistake' and also when that mistake could 'with reasonable diligence have been discovered'."