There was something of a hollow victory for the Inland Revenue in the House of Lords last week. The Lords backed Kenneth Colmer, an inspector of taxes, in his case against chemicals giant ICI. But despite the win, the Exchequer could end up losing millions of pounds in tax revenue from multinational companies as a result of what is nothing less than a landmark decision. The case of ICI v Colmer hinged on whether group tax relief could be given - that is relief on the profits of one UK subsidiary against the losses of another - when the parent is based in another EU country. The Lords, in accordance with a principle laid down in an earlier judgment of the European Court of Justice, decided it could. This means European law has overridden British law, which says that only subsidiaries with a UK parent can get group relief. Chris Fitzgibbon, tax partner at accountants Deloitte & Touche, says this ruling, plus an earlier one concerning the French group St Gobain, 'could cost the UK exchequer and other European exchequers considerable sums of money because of the increased flexibility in the way international groups can structure their European activities'. He adds that it is too early to tell precisely what that cost would be - but warned that it could run into millions of pounds. Both cases are founded on the principle that the EU Treaty allows people of one country to do business in another on an equal footing with the people of that country. ICI lost its appeal mainly because of the number of subsidiaries it has outside the EU. The company was denied its loss relief but was realistic in defeat. 'We're pleased with the judgment,' says a spokesman. 'Though we lost the case on the point of the facts of our submission, this is clearly a major milestone in the development of UK tax law.' A number of international companies stand to gain more in group relief than before the European Court decision. The ICI v Colmer case would not in itself grant group relief where one or both of the UK bodies was a branch of an EU company - a bank branch, for example - rather than a subsidiary. But the European Court decision in the St Gobain case gives branches the same double tax relief for dividends from overseas companies that subsidiaries would get, because otherwise that would be discriminatory. By the same principle, UK branches should now be entitled to group relief in the same way as UK companies. 'As a result of these two cases, the elastic has already stretched some way,' says Fitzgibbon. 'The question now is whether it will go any further.' He adds that there were a number of areas where UK companies and branches were under common control within the EU but not within the UK. They can expect more relief, mainly in the field of capital gains. 'Where one UK company transfers an asset such as a shareholding or a property to a related company, UK law prevents a tax charge being made if the two companies are under common UK control,' he explains. 'In the future we hope the Revenue can accept that the relief will be given where the common control is within the EU.' The Lords' judgment in favour of the Revenue was expected since it was in line with their interim judgment and the European Court on a point they had referred to it. The ICI case was concerned essentially with whether a UK parent, which had a majority of its subsidiaries outside the UK, could get tax relief for the losses of a UK subsidiary which it owned jointly with another UK group - so-called 'consortium' relief'. But the important point, referred to the European Court, was whether UK law was in breach of EU law because it discriminated against a company which had subsidiaries in another part of the EU. In the case of ICI, most of its subsidiaries were outside the EU, but had they been mainly within the EU, community law would have been breached if relief had been denied. 'A loss for ICI was therefore a victory for many other companies,' Fitzgibbon adds. The Revenue said it is considering its position following the Lords judgment. A spokeswoman says: 'We're taking everything in and considering what to do next.' It is too early to say when a Revenue response might come. However, in April this year, Revenue chiefs conceded, in the wake of the European Court decision, that group relief rules for UK companies contravened European law. Amendments to UK tax legislation are unlikely to be far away.
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