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Multinationals close to tax refund victory
From the Financial Times of Thu, 18 Dec 2014 19:15:17 GMT

Multinationals have moved a step closer to winning their long running court battle for up to £4bn of tax refunds, after the High Court ruled the UK government could not deploy a legal defence that would have effectively knocked out the claims.

The government has been attempting for 10 years to block the payments in complex litigation known as the Franked Investment Income Group Litigation, which has been brought by UK-based multinationals because of the tax treatment of income from their non-UK subsidiaries.

An appeal is now likely, but if HM Revenue & Customs eventually loses the case, it would face having to pay back huge refunds — for taxes overpaid as far back as 1973 — at a time when public finances are being squeezed.

The dispute turns on the government’s apparent breach of European anti-discrimination rules — enshrined in the 1957 Treaty of Rome — with its system of advance corporation tax (ACT) in place between 1973 and 1999.

Multinationals had argued that the rules were breached because companies with overseas subsidiaries ended up paying more tax than those with British subsidiaries.

The case is complex covering 23 issues and has entailed many court hearings in London and three separate referrals to the European Court of Justice.

The latest stage was partly to determine whether the Treasury could raise as a defence that they had “changed their position” by spending the overpaid tax and that they therefore could not be made to repay what they had in good faith already spent.

If the government had been allowed to deploy this defence, it could have knocked out the multinationals’ claims — estimated to be worth between £3bn and £4bn.

Giving his ruling, Mr Justice Henderson found the government had failed on the facts to make out a defence and found for the multinational claimants on two technical issues, including how much credit should be given for the tax paid by the subsidiaries in other states.

If HMRC had succeeded in its arguments on these points this would have significantly limited the size of the claims.

In his ruling, the judge was critical of Sir Jonathan Stephens, a senior civil servant who acted as an expert witness for HMRC and currently works in the Treasury reviewing arrangements for public sector pay.

Mr Justice Henderson said while he was well qualified to give evidence on public spending, part of Sir Jonathan’s report on the ACT system was “not based on his own knowledge or expertise, and amounted to little more than a presentation of arguments supplied to him by the Revenue”.

HMRC said: “The UK laws that the European Court first ruled against were amended in 1999 and 2009, so today’s High Court ruling applies to claims in the past.

“We are very pleased that some of our key arguments have been accepted and this will significantly reduce the repayments due but this is a complex ruling and we are studying it carefully. An appeal is likely.”

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