Revenue seals off tax loophole after M&S victory

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The Independent Online

HM Revenue & Customs sought to limit the impact of the European Court of Justice ruling, which it was feared would open the floodgate to copycat claims, by rewriting the law book to stop multinationals from abusing the judgment.

It plans to amend the UK tax-loss relief rules to stop companies from being able to offset losses sustained in other European countries against UK profits except in specific circumstances. Its reaction stopped far short of abolishing group relief altogether - the nuclear option feared by some.

The changes, effective from yesterday, will be included in the Finance Bill but are not expected to affect the pipeline of claims already lodged with the High Court as part of a group litigation order on behalf of companies including BT, Gap and Asda.

"It seems to be a targeted anti-avoidance measure to prevent multinationals from arbritraging losses as a consequence of the ECJ judgement on M&S," Mark Persoff, a senior tax lawyer at Clifford Chance, said. "It puts the burden of proof on the company to show their actions are driven by commercial reasons and not tax planning," he added.

Fiona Walkinshaw, at Reynolds Porter Chamberlain, a law firm representing seven of the corporations in the litigation, described the announcement as a "setback for businesses in trying to get fair treatment".

Estimates at how much the ruling by judges in Luxembourg would cost Gordon Brown have put the bill at £200m in claims for back taxes plus about £50m a year.

The Government said it had been alarmed at reports that "some tax advisers" have been suggesting businesses should take decisions purely to obtain UK tax relief.

It said the High Court would resume consideration of M&S's claim for tax relief for about £100m of losses sustained in France, Germany and Belgium in the late 1990s.