Making the Revenue shiver

One of the more egregious lies uttered by Denis MacShame in his letter to the Telegraph on Saturday, extolling the virtues of the EU constitution was that "it would also shut the door on tax, welfare and economic harmonisation."

Taking on board the specific claim on tax harmonisation, this Blog has reported many times on how the commission, in conjunction with the ECJ, has been pushing the tax agenda and how it has been using existing treaty provisions, without needing the constitution.

And my colleague has drawn attention to the speech of Baroness Noakes who outlined in her House of Lords speech just how far the process of tax harmonisation had gone.

Now, in two separate articles, one in the Financial Times and the other in The Times today, we see further confirmation of how far the tax sovereignty of the UK (and other EU member states) is being eroded.

The immediate causus belli is a case taken by the retail conglomerate Marks and Spencers which goes to the ECJ tomorrow, starting what is considered to be one of the most important tax cases for years – so much so that the FT story is headed: "Taxing problem assumes colossal importance".

The case concerns the government's denial of tax relief for business failures in other parts of the EU and it has the potential to cost the government hundreds of millions of pounds in tax revenues and have a ripple effect throughout the EU.

The FT believes – as do we – that it could also trigger far-reaching changes in the tax laws of most European countries, which could be forced to harmonise their tax treatment of the losses from domestic and foreign subsidiaries. Many businesses are concerned that governments may remove tax privileges from companies operating in their home market as a short-term move to protect their tax revenues.

As an indicator of just how important this case is, the High Court judge, Mr Justice Park, the Chancery division's acknowledged tax expert, who referred it to the ECJ, declared: "It is to me self-evident that the issue in this case is hugely more important than a multitude of issues which I have seen referred to the European Court."

He added: "I don't know how many other companies are queuing up behind M&S. But the amounts involved make me shiver, and I'm sure they make the Revenue shiver also."

And indeed "the Revenue" is shivering, witness the times report which has it that "worries" treasury officials are in secret talks with leading multinationals over the issue, and have been make confidential soundings among tax chiefs at Britain’s biggest companies about potential remedies if the ECJ goes with Marks and Spencers.

Says The Times, an almost unbroken series of successful taxpayer challenges in the European Court of Justice suggests M&S is likely to win its argument. It is claiming just £30 million but some 60 UK and foreign multinationals are preparing a class action to follow M&S, claiming reimbursement of billions of pounds because they were denied group relief for losses incurred in other EU states.

We learn that confidential discussions with FTSE 100 finance directors suggest that civil servants are even looking at radical steps, such as scrapping group relief, in order to defend the UK tax system from what some tax experts call "tax harmonisation by the back door".

However, it may be six months or more before we get a result from the ECJ – which could put it bang in the middle of the EU referendum campaign, but already the Treasury is having to reassess corporation tax and prepare for a Finance Bill in 2006.

The head of taxation at a leading energy company is saying that nothing less than a complete rethink was necessary and that the Treasury will have to restructure the entire corporate tax system. But such wholesale "reforms" as might prove necessary could damage the UK at a time when the covernment’s ability to raise funds from company profits is being questioned.

Bill Dodwell, a tax partner at Deloitte & Touche, reckons Britain has a lot to lose if it gets it wrong. "The UK raises more proportionately from taxing company profits than other EU countries," he says.

And there we have little MacShame bleating from the sidelines that the constitution would "shut the door on tax… harmonisation." It will do no such thing.