Tax Cases

A ruling by the Advocate General of the European Court of Justice, in the case of Bosal Holdings, further spreads the influence of European Union law on United Kingdom corporation tax, says Deloitte & Touche.

The case concerns a challenge to Dutch tax law that only allows a tax deduction for the interest cost of financing a subsidiary if the subsidiary has a source of income in the Netherlands.

In other words, the subsidiary must be a Dutch company or a foreign company with a Dutch branch. The Advocate General has recommended that the tax deduction should be available to any Dutch parent borrowing funds to finance any European Union subsidiary.

If the European Court of Justice upholds the ruling, tax advantages granted to the United Kingdom parent of a group of United Kingdom resident companies must be extended to a United Kingdom parent of European Union resident companies, regardless of how the subsidiary is taxed.

For United Kingdom groups, these advantages could include loss relief, exemption of tax on dividend income and capital gains deferral.

'This is the latest in a recent line of tax cases that challenges United Kingdom domestic legislation on the grounds that it is discriminatory', says Adam Craig, head of the European Union practice at Deloitte & Touche in the United Kingdom. He added that these rulings could cost the Exchequer billions of pounds, but that they 'frequently establish valid precedents, and companies should not be put off making claims based on European Union law'.

The European Court of Justice is expected to complete its deliberations on Bosal Holdings in December. If it confirms the opinion of the Advocate General, as it normally does, then, says Adam Craig, the Revenue can expect a flood of claims from United Kingdom companies for tax advantages normally reserved for the parents of United Kingdom groups. United Kingdom companies should therefore review their position now and make the necessary claims as soon as possible to preserve their rights on any later limitation imposed by the Government or the courts.

No right to challenge

Twickenham Film Studios Ltd had paid advance corporation tax which had been available to set off against corporation tax due, and it was set off against that tax otherwise due for an accounting period, namely period C. The company's return for period D showed a large loss, so it was allowed to carry part of that loss back to period C, which reduced the profits figure for period C to nil. Thus no corporation tax was due against which the advance corporation tax could have been set. The advance corporation tax therefore fell to be set off against the corporation tax due for accounting period B.

The assessment for period B was an estimated assessment, as the taxpayer had been late in submitting an assessment for that period. The Revenue's assessment had been used to calculate tax due for period B. In allowing the advance corporation tax as a set off against tax for period B, the Revenue mistakenly used figures given by the taxpayer in a tax return for period B provided after the Revenue had made its assessment for that period, which had been lower than those in the Revenue's estimated assessment. That resulted in a repayment of tax which, the Revenue argued, should not have been made.

The Revenue issued an assessment under section 30, Taxes Management Act 1970 in order to recover that tax. The taxpayer appealed to the General Commissioners against that assessment. The Commissioners allowed the appeal, so the Revenue appealed to the High Court by way of case stated on the ground that the Commissioners had, in effect, held that the Revenue had acted unreasonably in exercising the discretion conferred on it by section 30 of the Act, and that the Commissioners had no power to do this.

Mr Justice Lloyd said that it was not open to the General Commissioners to consider a challenge to an assessment on grounds of public law, such as that the Inspector had acted unreasonably in raising the assessment under section 30. They could neither substitute their own view, nor review the Revenue's decision on the grounds that it had been unreasonable. No-one had the right to do the former, and the latter was open only to the Administrative Court, by way of judicial review.

The Revenue's appeal succeeded.

(Guthrie v Twickenham Film Studios Ltd, Chancery Division, 27 September 2002.)

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