EU ruling states HMRC must repay £5-£7bn in tax to multinational companies
Poor old HMRC can’t win. On one hand they are vilified for allowing companies like Starbucks (yes, we’re still on that) legally avoid millions of £ in tax, but on the other, when they try and clamp down, their good friends over in Brussels say they have been too hard on poor little multinational companies. An EU ruling this week means HMRC could have to repay up to £5bn, or even up to £7bn, in overpaid corporation tax to multinational companies.
The problem is that, under old corporation tax rules, UK corporate groups paying dividends between individual companies were able to get relief for advance corporation tax paid in the UK, but dividends paid in to a UK company from abroad did not qualify for relief. The reasoning behind this was to prevent tax avoidance by these companies.
A long fought class action, led by British American Tobacco Plc, has been running since 2006, where the EU ruled that these tax rules, long since abolished, were, in fact, contrary to EU law and discriminatory (against other EU companies) in nature. This week, the Luxembourg court has further ruled that “unlawfully levied advance corporation tax must be repaid.” Tax repayments could, potentially, go all the way back to the introduction of ACT in 1973. We hope HMRC were sitting down when they heard the news.
Graham Aaronson, barrister for the claimants, described the ruling as “a resounding success”, saying it had “destroyed HMRC’s last hope” of limiting its payouts to mere £millions . Interestingly Mr Aaronson recently wrote a report for HMRC on the viability of a General Anti-Avoidance Rule (GAAR), cautioning against heavy-handedness and permitting prudent organisation of tax affairs to minimise tax.
A spokesman for British American Tobacco told the FT: “Today’s ruling reconfirms our belief that we are right to seek to reclaim the tax we overpaid in the 70s, 80s and 90s as a result of double taxation.
“UK rules at the time meant that UK profits were only taxed once but that all profits made elsewhere in the EU were taxed twice – once in their country of origin and again when they were distributed to the UK – resulting in us being taxed twice on the same profits over a sustained period of time.
HMRC described themselves as ‘disappointed’ with the ruling: “We will consider the implications of the ruling in the overall context of the case, which has a number of aspects and complexities that remain to be settled in the domestic courts.”
“There are also further proceedings pending at the European Court following a recent Supreme Court reference there for the third time. Because of the further hearings in the UK and European courts there is currently no tax to be repaid following this judgment.”
Even so, HMRC must accept there will be a red letter landing on their mat, it’s just the amount of the bill that’s in question. Still, according to a National Audit Office report earlier this year, HMRC regularly write off £5bn+ in due, but uncollected, tax each year. Guess they must have deep pockets then.