David Jetuah, Accountancy Age, Wednesday 6 October 2010 at 12:39:00

UK is told by European Commission to jettison six-year limit for claiming taxreimbursements

Brussels has decided UK tax policy breaks its laws. The European Commissionhas laid down an ultimatum for the UK to scrap a six-year limit for taxreimbursements to taxpayers.

The EC wants the cap removed on the grounds that it makes it ?almostimpossible? for taxpayers to exercise their rights to repayments.

Any tardiness in scrapping the limit would open up the UK to a threat of theEC referring the issue to the European Court of Justice.

But what is at stake for the UK? What areas of tax are most affected? Is itlikely that the Treasury will take on the European Commission in the courts, anddoes it have a chance of winning?

The EC?s main gripe is that it may take more than six years to reach adecision on long-running tax issues, meaning that a ruling handed down outsidethis period does not benefit British taxpayers.

Clearly, scrapping the legislation would mean UK taxpayers could claimreimbursements going further back in time, raising the government?s potentialliabilities.

The stakes are potentially high for the UK because the issue particularlyaffects direct taxation ? an area that includes income tax, corporation tax,capital gains tax and inheritance tax ? disputes over these issues can take avery long time to resolve.

But the word ?potentially? is important because the EC has not accused thegovernment of a blanket breach of European law in levying these taxes. Eventhough the taxman brings in hundreds of billions in tax revenues it takes greatcare not to ride roughshod over taxpayers? rights.

Despite the government not making a habit of infringing taxpayers? rights,there are key exceptions which have led to landmark cases. It is these that willgive the government a headache when deciding whether or not to fight thisbattle.

If they decline to contest it, then cases such as the Thin Cap grouplitigation order ? a fight regarding overpaid corporation tax ? could becomeeven more costly for the taxman than the hundreds of millions of pounds advisershave estimated.

This is because the six-year cap for claiming reimbursements would evaporate.Advisers have said the six-year cap was the one barrier to the taxman sufferinghigher costs in the dispute.

Leaving the commission?s ruling uncontested would therefore mean the UKgovernment will have additional repayments to make at a time when it canill-afford for money to be leaching out of the UK?s coffers.

If it decides to contest the EC?s ultimatum, the government has anotherproblem: the courts have already decided in another dispute that a three-yearcap was introduced by government without giving companies time to prepare.

This preparation time is known as a transitional period and the three-yearcap was judged to be incompatible with European Union law because of itsabsence.

The EU does not like the fact the six-year limit also lacks a transitionalperiod, so taking the previous loss as a precedent, the chances of the EUfinding in favour of the taxman are low.

The government also failed to consult on the six-year cap, and these pointstaken together led one leading tax adviser to say the government didn?t have ?ahope in hell? of winning.

Of course, dragging the case through the courts also gives it a higherprofile and therefore alerts more people who may be in line for a reimbursementthat the issue is being considered, raising the potential costs even higher forthe government.

The UK now has until the end of November to make its decision to repeal thelegislation, known by tax advisers as S107, before the case is automaticallyreferred to the EU?s Court of Justice.

?Virtually all tax advisers think [S107] is contrary to EU law,? said BillDodwell head of tax policy at Deloitte. ?We think that the UK won?t be able tobeat the case off [in the courts].?