Partner Article

HMRC may repay billions following tax appeal

If the opinion of a senior European lawyer is accepted, then several billion pounds may need to be repaid by HMRC to UK taxpayers.

In a tax appeal to the Court of Justice of the European Union (CJEU) relating to the now defunct Advance Corporation Tax (ACT), the Advocate General agreed with the majority view of an earlier UK Court that legislation introduced in 2004 is contrary to the principle of effectiveness, legal certainty and legitimate expectation.

ACT was a tax on companies payable in advance (shortly after a company paid a dividend) between 1973-1999. The tax was found to be incompatible with freedom of establishment and free movement of capital within European law.

In order to limit exposure to the reimbursement of what it considered to be inappropriate ACT, the Government sought to retroactively and without any transitional arrangements, restrict the time limits under the Limitations Act for making claims for the restitution of taxes incorrectly paid as a result of a mistake by the taxpayer or government.

As noted in the historic Marks & Spencer VAT decision (resulting in claims for VAT repayments going back to 1973), although a Member State can introduce specific time limits for the making of claims of overpaid or incorrectly imposed taxes, it must do so on a prospective basis, and give an adequate transitional period for an individual (or company) to determine and submit a claim for reimbursement of tax incorrectly levied.

By making the retrospective adjustment to the Limitations Act, the UK may have further exposed itself to significant tax repayments.

Although the Government emphasised this case could result in the disruption of public finances if several billion pounds had to be reimbursed, the Advocate General didn’t appear to be swayed. Indeed, he noted that Member States were under obligation to repay not only the tax levied in breach of EU law, but interest on it also.

We’ll now have to wait for the CJEU’s final decision and those of the UK Courts in respect of specific claims.

Whilst it will be welcome news for taxpayers still seeking repayment of ACT (and possibly UK tax on overseas property income or overseas dividend income), we expect it is bad news for HMRC which had presumably hoped it wouldn’t have to repay any more tax on the same scale as the M&S reclaims.

This was posted in Bdaily's Members' News section by Baker Tilly .