Treasury faces £7bn tax rebate bill

A ruling from the European Court of Justice could pave the way for multi-million pound tax rebates to UK companies, including British American Tobacco and Aegis, landing the Treasury with a bill of up to £7bn.

The Treasury could face its biggest tax repayment bill to date as well as changes to the way companies are taxed on dividend income if yesterday's opinion from the legal adviser to the ECJ is upheld by the court.

BAT and Aegis brought the case, arguing that imposing corporation tax on dividends from EU subsidiaries, which does not apply to dividends of UK resident companies, breached EU law. The ECJ's advocate general backed that view yesterday. The court follows his opinion in two-thirds of cases. The Treasury estimates claims could amount to £7bn because they stretch over three decades.

Yet the claimants reckon the amount is in the region of £100m to £2bn due to technical restrictions on what can be claimed.

Chris Morgan, the head of the EU law group at KPMG, said: "[It] was an unlawful, unrelievable, double tax on foreign profits suffered by UK parent companies. It is important, however, to appreciate that the beneficiaries of an ECJ ruling in favour of the taxpayer will not only be the claimants themselves but any UK taxpayers receiving dividends from EU companies."