Treasury faces ?768m tax bill

The Treasury may have to pay out huge refunds after an EU legal adviser said Marks & Spencer should be allowed to deduct some of its foreign losses from its UK tax bill.

According to a recent report by Morgan Stanley, the Treasury may have to pay out as much as ?768m overall. Other UK-based companies, such as BT, the telecommunications giant, have filed similar cases with British courts.

Miguel Poiares Maduro, the advocate general of the European court of justice in Luxembourg said M&S was justified in asking for the deduction under EU law. The European court is not expected to rule on the case until July, but usually accepts the advocate general's opinion.

Today's decision will horrify cash-strapped EU governments as they face the prospect of large payouts. The German finance ministry warned there would be clear risks to Germany's budget if the advocate general's opinion was confirmed by the court.

A report presented to Germany's 16 states in February said such European court rulings could cost Germany billions of euros in lost tax revenues and that preventive action at the national level would be needed.

Greece, France, Ireland, the Netherlands, Finland and Sweden backed the British government in the case, fearing they could lose out if M&S won and companies demanded tax reimbursements.

M&S made its original application for tax relief to the Inland Revenue in March 2000 and said it would gain over ?30m from a ruling in its favour.

"We are encouraged by the advocate general's opinion and we now await the ECJ's decision later this year," M&S said.

In his decision, Mr Poiares Maduro said M&S had been wrongly discriminated against by the UK government, and should be allowed to offset losses at foreign subsidiaries against the parent company's profit.

He said Britain's refusal of the tax advantage "might be regarded as a restriction contrary to the (EU) treaty".

"The principle of territoriality cannot justify the current restriction," Mr Poiares Maduro said in his opinion, adding that the current British tax rule "creates an obstacle" by dissuading companies in Britain from setting up businesses in other EU countries.

He said, however, that companies established in the 25-member EU should not see the ruling as a way to shop around for the best rates to avoid taxes in their home country, adding that businesses may not deduct a loss in both their home country and in other nations where it set up subsidiaries.

Britain's high court referred the M&S case to the European court of justice in 2003. The retailer claims that British tax law violates EU single-market regulations by prohibiting companies from writing off losses abroad against domestic profits. Some EU countries, including Italy, Denmark and Austria, already allow foreign losses to be deducted.