The UK Government may have to hand back as much as £5bn to £7bn in taxes to major UK-based companies after a European court found HM Revenue & Customs had breached EU rules.
The judgment, handed down on Tuesday, threatens to open the floodgates for businesses to claim refunds that go back as far as 1973 and comes despite mounting public furore over tax avoidance by multinational companies.
However, rather than seeing money returned, the ruling by the European Court of Justice means that HMRC now faces paying out billions of pounds to companies.
British American Tobacco, along with other litigants thought to include BA’s pension fund scheme, have been fighting a class action lawsuit against HMRC both in the UK and in Europe since 2006.
The claimants which are headquartered in the UK say they have been taxed unfairly by HMRC for decades.
The case rests on the tax treatment of dividends received by UK-resident
companies from companies in other EU member states.
Under the advance corporation tax rules, which were abolished by Gordon Brown in his first budget, companies had to make an advance payment of tax when they distributed dividends to shareholders.
A company receiving a dividend from a UK subsidiary was able to treat it as “franked investment income” which it could offset against its advance corporation tax.
But if a UK company was receiving dividends from an EU subsidiary it was not entitled to that relief. This, the claimants said, amounted to double taxation.
HMRC said there were further court proceedings pending and “there is currently no tax to be repaid”