High Court Rules UK Double Tax Relief System Is Unlawful

by Robin Pilgrim, LawAndTax-News.com, London

02 December 2008

The High Court in London has decided that the United Kingdom’s double tax relief system infringes European law, in a case concerning the tax treatment of dividends received by UK-resident companies from companies resident in other European Union (EU) member states

The court decided in the Franked Investment Income Group Litigation Order that the UK broke the law by taxing dividends paid to the UK from European Union-based companies, in which the UK shareholder owned more than 10%.

Commenting on Mr Justice Henderson's decision, Bill Dodwell, tax partner at Deloitte, observed: "He has carefully examined the full background to the European Court of Justice’s (ECJ) decision which, on this aspect, was confusing and poorly expressed."

Dodwell added: "This means that the UK is not entitled to charge tax on dividends from EU-based companies, and groups which have suffered such tax liabilities may now be able to seek refunds. However, he has concluded that these rights do not extend to dividends from countries outside the EU.

“The cost to the Exchequer of this aspect of the judgment is likely to be relatively modest though; it is thought that actual UK tax paid on all overseas dividends is no more than GBP100m per annum and the majority of dividends on which tax has been paid are likely to have come from outside the EU. Interest will of course be due on repayments.

The judge also held that attempts to limit direct tax claims to the last six years contravened European law. This opens up extra possibilities for companies to make EU-based direct tax claims.

Dodwell continued: "The judge followed the well-known decision of the House of Lords in Condé Nast – that if the government seeks to curtail existing rights, a transitional period to allow those affected to make claims must be allowed. As a result, it is likely that the Treasury will need to grant a new transitional period for all EU direct tax claims, as it has done for VAT claims. Given the clear judgement on this aspect, it would be sensible for the Treasury to accept the point and act immediately, rather than prolong the period by taking it to the House of Lords."

Dodwell said that other aspects of the judgement related to the now abolished advanced corporation tax system and will therefore be of more limited interest – although significant amounts of money are at stake.

"Here, the judge accepted some claims, refused others and suggested that further references to the ECJ would be necessary," Dodwell explained. However he added that: “Inevitably, the judgement will be appealed.”

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