UK Set For New Clash With EU Over Tax Legislation, KPMG Warns

by Robert Lee, Tax-News.com, London

11 December 2006

Draft legislation issued by the United Kingdom government last week seeking to limit the ability of companies to claim back overpaid tax "almost certainly" contravenes EU law, according to accounting firm KPMG.

The legislation comes in response to a recent House of Lords ruling involving Deutsche Morgan Grenfell, which potentially paved the way for corporates to receive rebates for overpaid tax going back to 1973.

KPMG said that under current rules, where a claim is pursued directly through the courts, a company has a six year period in which to reclaim tax that it has paid in error. The key point challenged in the Deutsche Morgan Grenfell case is that of when this six year time period begins. In this case, the House of Lords held that the six year period should commence from the date that the taxpayer knew that the payment was made by mistake.

Potentially, this ruling meant that the Treasury was open to claims for repayments of tax dating back to 1973 – when the UK joined the EU – provided the claims were made prior to blocking legislation introduced in 2003.

The UK government is now legislating to change the date at which the six year period commences to that of the date on which the tax is paid, which would act retrospectively from 8 September 2003, thus covering periods not already dealt with by the blocking legislation introduced that year.

“HMRC had estimated that the ruling in Deutsche Morgan Grenfell could cost the treasury billions of pounds," commented Jonathan Bridges of KPMG’s International Tax team.

"The retrospective nature of this proposed legislation closes the door to many taxpayers seeking a rebate of an overpayment of tax paid in error. This omission of any transitional period, in our view, clearly contravenes EU law," he concluded.

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