The Marks and Spencer Case: EU forces changes to British tax law
For Immediate Release
EU forces changes to
British tax law
THE MARKS & SPENCER CASE
The European Court of Justice and Taxation
Today the ECJ ruled on British tax law. The long awaited
judgement from the unaccountable ECJ could cost the British taxpayer billions
of Pounds. The fact that the EU has overturned UK tax law shows that Blair’s
famous red-line, which he claimed he secured when the EU Constitution was
being drafted, was in fact a red-herring. British governments had already
surrendered the UK’s right to determine about 20% of this country’s
The Bruges Group have been warning the Government for many years as to what
might happen. Now Blair and Brown will learn, but this will be a lesson learnt
at the taxpayers cost.
The decision today shows that the EU has usurped the right to make UK tax
laws. The ECJ has struck-out well-established UK rules in pursuing the
Brussels goal of tax harmonisation. This will cause uncertainty for business
and government funding. The government has known about this risk since at
least 1999, and should now act to bring back control of the UK’s tax
the ECJ has ruled that,
"The Court reiterates, first of all, that although direct taxation is within
the competence of the Member States, the latter must exercise that competence
with respect for Community law."
The treasury has so far refused to reveal the extent of the costs of this
of UK tax law under assault from the EU are:
Areas already under the control of the EU are:
- overseas dividends,
- transfer pricing,
- anti tax-haven legislation (Controlled Foreign Company tax),
- taxation deducted from savings income (Withholding tax),
- the rules governing the use of tax losses belonging to one UK company to
other companies in the same group (Group relief),
- rules that prevent overseas owned companies getting UK tax relief for
excessive interest payments to their parent, (Thin Capitalisation).
- where tax is triggered when people seek to move assets offshore and would
otherwise be able to dispose of them tax-free,
- taxation of dividend income received from overseas companies,
- and those laws that prevent UK subsidiaries of groups based in other EU
states obtaining tax relief for artificially
large interest payments on loans from their Parent Companies.
Robert Oulds, Director of the Bruges Group says,
"It is wrong that the unelected ECJ controls much of British tax law. The
American colonies revolted for less, whatever happened to ‘No taxation without
"Gordon Brown must be incensed. The European Court of Justice will cost the
British taxpayer an untold sum and force Gordon Brown to raise taxes to fund
his budget deficit.
"Combining this with other cases due to be considered by the ECJ, most notably
the Cadbury Schweppes case, and the potential of Britain loosing the budget
rebate means that there will be a serious black hole in the nation’s
"The EU destroyed the Conservative’s reputation for economic competence when
the Pound fell out of the exchange rate mechanism. It seems that the EU will
destroy Labour’s reputation for financial prudence."
Click here to obtain full details of the ECJ's
Current British tax law
Group Relief is available between companies that are either UK resident or
have a branch subject to corporation tax in the UK, and which are under 75%
Group relief works by the company with losses surrendering them to the company
with profits, who then uses those losses to reduce their own corporate tax
This law has been in existence in the UK since the 1960s at the latest.
The Marks and Spencer v Halsey case arose from M&S seeking to
surrender losses of French, Belgian and German companies against the profits
of their UK companies for years in the mid-90s. M&S are unable to do this
under UK statute but are claiming under Article 43 (Freedom of Establishment)
and Article 56 (Freedom of Capital) that the rules that prevent them doing so
are discrimination under the EU Treaty, as it favours the establishment of
business and capital in the UK rather than in other member states. Tax laws
that are so discriminatory are then regarded as invalid under the law of the
relevant Member State.
1. Today’s judgement follows a line of cases held by the
European Court of Justice since the 1999 case of ICI v Colmar. These
cases, taken from many Member States, potentially strike out direct tax
provisions including transfer pricing, controlled foreign company, group
relief, thin capitalisation, taxation of dividend income, payments into
pension schemes and migration, and effectively this judicial law-making is
forcing member-states to have a common tax base.
2. The M&S case was originally heard at the Special
Commissioners in 2003, where the court held in the Inland Revenue’s favour, on
the basis that the difference in treatment of overseas subsidiaries, was a
difference, and that not every difference was necessarily discriminatory, eg
in M&S' case there was a corresponding benefit to the disadvantage in that the
overseas subsidiaries’ profits would not be taxed. M&S appealed to the High
Court, who referred the matter to the ECJ as it required an interpretation of
unclear European law. The Advocate General opined in M&S’s favour in Spring
3. No-one, with the exception of HM Treasury and government
ministers, knows the quantum of UK tax at stake in respect of all the EU
cases, Accountancy Age estimated it to be approximately £20
billlion. Tax refunded in respect of prior years will also include
interest due to the taxpayer from the time when the tax payment for the
relevant year fell due.
4. HM Treasury has constantly refused to answer the question
when tabled in the House of Parliament, the reasons given including that it
may be prejudicial to relations with multinational bodies, and it would
increase the cost of government debt.
5. UK tax law is also under assault from corporates taking
the government to the ECJ in respect of transfer pricing, taxation of overseas
dividends, controlled foreign company rules (UK anti-tax haven laws), tax
credits on pre-1997 dividends paid from non-UK EU companies, overseas
6. UK corporates have claimed back tax paid in previous years
on the basis that the existing taxing provisions of UK law were contrary to
the EU treaty. These claims are thought to go back as far as 1973, but most
start in the mid-1990s.
7. The government has known about the risk of these cases
following the related case of ICI v Colmar in 1999, and has failed in subject
Treaty renegotiations and the EU Constitution to confirm that EU authority
does not extend to direct tax laws of Member States. The government has
sought to introduce measures to limit how far back legitimate claims can be
made, some of which may also be illegal under EU law.
8. The government has been forced to change transfer pricing
rules (Introduction of UK-UK transfer pricing in 2004) to fit with the ECJ’s
decisions, causing a considerable administrative strain on business. Other
member states have changed their transfer pricing rules so they do not apply
to intra-EU transactions.
9. In PBR 2005 on 5 December 2005 confirmed that both the
Film Tax Credit and Leasing corporate taxation rules will be changed. The
government gave almost no attention to the fact that both these changes have
come about in order to fit UK tax law within EU rules.
10. The European Commission has a Common Consolidated
Corporate Tax Base Working Group, presently seeking to determine and implement
a Common Consolidated Tax Base across the EU.
further information contact:
The Bruges Group
216 Linen Hall, 162-168 Regent Street, London W1B 5TB
Tel: +44(0) 20 7287 4414
Fax: +44(0) 20 7287 5522
Mobile: 0774 002 9787