Tax victory for M&S could open floodgates for claims

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A host of British businesses could be in line for a multi-million pound tax windfall after a legal case mounted by Marks & Spencer won backing yesterday from a senior adviser to Europe's highest court.

A host of British businesses could be in line for a multi-million pound tax windfall after a legal case mounted by Marks & Spencer won backing yesterday from a senior adviser to Europe's highest court.

The legal opinion at the European Court of Justice is likely to lead to the loss of billions in the Treasury's tax revenue, forcing the Government to change the law and have similar reverberations across the EU.

M&S challenged a ruling barring it from offsetting £30m of losses made by subsidiaries in continental Europe against its UK tax bill. The European Court's Advocate General said in a legal opinion that a system which made it impossible to offset losses abroad "under any circumstances is incompatible with community law". A final judgment will be made in several months but, in the overwhelming majority of cases, judges follow the opinion of the Advocate General.

The dispute arises from the losses made by M&S's stores in France, Belgium and Germany between 1998 and 2001 before the company closed them, but its implications go far wider. Accountants believe the Government may stand to lose £1bn because other companies are pursuing similar legal action.

Reynolds Porter Chamberlain, lawyers for some of the companies involved, said: "If, as expected, the opinion is adopted by the court, the Revenue now faces the prospect of paying substantial sums to claimants already signed up to the litigation and the prospect of further claims." Morgan Stanley has estimated the maximum total to be £768m, with BT standing to gain as much £404m, Intercontinental Hotels £131m, Legal & General £40m and Carphone Warehouse £27m.

However, Joy Svasti-Salee, director of Grant Thornton, said: "Marks & Spencer has won its primary argument that group relief ought to be available on a Europe-wide basis. But it is possible to put in place legislation that would not allow that to continue on a go-ahead basis."

Tax experts say the door is now open for the Government to change the law so that it can continue to block tax relief from overseas losses if tax relief is available in the country where the losses occurred. "This would mean the Government could continue almost with the status quo, as the bulk of the EU member states, barring Belgium, have their own offset rules," Christopher Sanger of Ernst & Young said yesterday.

Advisers at Linklaters said the Government could set up a system similar to that used in Denmark, where all foreign losses are consolidated and offset against UK profits but profits made by foreign subsidiaries are also subject to UK corporation tax.

Some experts suggest the opinion may even allow companies not only to move losses around Europe but also any asset. A company that owns a brand or other intellectual property, for example, could potentially transfer it to another company within the same group but located in a lower tax regime, such as Ireland. At the moment, such a transfer would incur capital gains tax but that would no longer apply under the Advocate's opinion.

The Treasury, which cannot afford a sizeable reduction in corporate taxation, said it was waiting for the final judgment of the European court. "Only then will we be able to consider fully the implications for the UK tax system, and weigh up the next steps we must take. Whatever the outcome, we will continue to ensure that all companies pay their fair share towards our public services and oppose both tax harmonisation and the use of arrangements designed simply to avoid tax."

There was some relief for the UK coffers in a separate decision by the Advocate General issued yesterday on the subject of tax avoidance. If this opinion is heeded by the court, Halifax, BUPA and the University of Huddersfield will fail to recover VAT worth a total of about £43m.

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