A controversial court case starting next month could force HM Revenue & Customs to pay tens of billions of pounds in tax refunds to big businesses. Alex Rankine reports.
Frederick and David Barclay are holding out for £1.2bn from HMRC
(Image credit: Copyright (c) 1999 Rex Features. No use without permission.)
A controversial court case starting next month could force HM Revenue & Customs to paytens of billions of pounds in tax refunds to big businesses. Alex Rankine reports.
What's happened?
HM Revenue & Customs, the UK tax authority, has appealed to the Supreme Court in the latest round of its battle to avoid paying a £1.2bn tax refund to Littlewoods, the home-shopping company. Littlewoods, which is owned by the billionaire Barclay brothers, has already received £454m for wrongly charged VAT dating back 30 years, but argues that it should receive compound interest on the refund. The case, which begins on 3 July, could have implications for many other disputes where big businesses allege that they were overcharged by the tax authorities over several decades.
Which other firms are involved?
No comprehensive list is available, but more than 25 groups are thought to be involved in the Franked Investment Income Group Litigation, as the claims are known. The firms claim that UK tax law prior to 1999 discriminated against companies with overseas subsidiaries by charging them more tax than firms with solely British subsidiaries. These rules breached European law. Some companies with overseas investments saw "profits taxed both in the state they originated in and in the UK" under the old regime, says PricewaterhouseCoopers tax partner Peter Cussons.
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British American Tobacco, the test case for the action, received a £1bn payout from HMRC in 2016. Other claimants are thought to include EMI Virgin Records, HSBC, Aegis, GKN, Prudential and the successors of firms including Imperial Chemical Industries and British Steel.
What have the courts ruled so far?
The case has been rumbling on since 2003, with three different judgments from the European Court of Justice since 2006 and several decisions by the High Court and the Court of Appeal. Most of these cases have ended in defeat for HMRC. Indeed, the Supreme Court has already ruled on one aspect of the dispute before, when it decided in 2012 that the Treasury had breached EU law by retrospectively blocking tax refund claims. The repeated judgments in favour of big business have more recently become a source of political contention.
Boris Johnson and Michael Gove made reference to the case during the EU referendum campaign last year, writing in a letter to David Cameron and George Osborne to criticise "the multibillion tax refunds we are having to make to big business because of decisions of the European Court setting aside our tax legislation" and arguing that "the European Court will continue to prioritise the rights of big companies, not our public services".
So why is HMRC still fighting?
HMRC now accepts that it must repay the firms for the overcharged tax but wants to avoid also having to shell out for compound interest (see page 10) on the tax refunds. The Franked Investment claims stretch back as far as 1973 and the compound interest can thus dwarf the initially overpaid sum.
In the Littlewoods case, HMRC has already repaid £204m for overpaid VAT and £250m in simple interest on the refund, but Littlewoods argues that it is entitled to £1.2bn of compound interest charged on the interest already earned. It is the compound interest issue that potentially "turns the sums from disturbingly large to public finance-busting", says Felicity Lawrence in The Guardian.
How much could it cost?
HMRC's 2015-2016 accounts state that it expects to repay £5.9bn because of legal claims for tax refunds with a further £49.1bn in contingent liabilities, an increase of 37.9%. This means that in the worst-case scenario the taxman expects to be on the hook for up to £55bn in tax refund claims, with a major chunk of that figure believed to come from the Franked Investment litigation.Tax disputes are thought to be the third-biggest source of potential pay-outs from the UK government (see below).
That sum is nearly half of the NHS's annual budget and large tax repayments to multinationals at a time of fiscal restraint will spark fierce political controversy. The Treasury is also likely to face criticism over its handling of the dispute. It previously had the opportunity to settle the cases for much smaller sums at a time when the public finances were healthier, but instead chose to fight for more than a decade through the courts.
Can the government claw this back?
Yes, it wants to do so. The government introduced a new 45% corporate tax rate on the restitution interest paid as part of tax refunds in 2015. The new rate means that firms receiving substantial payments for foregone interest will have to pay 45% tax on much of the awards rather than the standard 20% corporate tax rate. Tax accountants decried the move, with KPMG's Chris Morgan quoted in the FT describing the measure as "spiteful" and "pretty outrageous".
However, the government has argued that corporate tax rates were higher at the time the companies overpaid and that to let them pay tax on the awards at the lower rate in force today would thus give them an "unfair tax advantage at the expense of the public purse". Affected businesses have sought a judicial review, but the High Court has held up the case as few, if any, have yet been charged the new rate.
Britain's other big liabilities
The Treasury's potential £55bn tax refund bill is not the only major liability facing the UK exchequer. Medical liabilities are a growing cost for the NHS, with the NHS Litigation Authority having made a £56.4bn provision for medical negligence payments over the coming decades. There are also substantial long-term costs involved in decommissioning and managing waste from 17 of the UK's earliest nuclear power plants, some of which date from the very earliest days of the post-war nuclear industry in the 1940s. The UK's nuclear decommissioning authority last year estimated that the costs of cleaning up the UK's nuclear sites were likely to total £117bn, although that figure will be spread over the next 120 years.
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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.
Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.
He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.
Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.
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