M&S wins European court judgement

Judges in Luxembourg said the Inland Revenue's refusal to allow companies to offset their losses in another EU country against their UK profits violated EU rules.

The verdict will save Marks & Spencer an estimated £30m - but it will cost the Treasury far more if thousands of other UK-based cross-border companies now demand repayment of tax money taken under the same rules.

Marks & Spencer went to court when it found it was unable to lower its UK tax bill by offsetting heavy losses incurred in the 1990s in German, French and Spanish subsidiaries against its UK profits.

The company, resident for tax purposes in the UK, sought "group relief" under UK tax laws.

But the claim was refused on the ground that "group relief" only applied to losses incurred in the UK. The High Court sent the company's appeal to the European Court of Justice.

Under current UK tax legislation, a multinational company resident in the UK can only claim UK tax relief on UK-incurred losses. If the losses occur in a company subsidiary elsewhere in the EU, they cannot be offset against UK profits.

But John Campbell, tax partner at KPMG in Newcastle, said the decision would cost the Treasury hundreds of millions, rather than billions, because the court ruled that a company could not get tax relief twice - for example, in the country where it sustained the losses, and then again in the UK.

It could only get tax relief in the UK if it had failed to get the tax relief in the European country.

He said: "We're aware of hundreds of these claims in the UK, and at least a dozen from companies in the region. But they are unlikely to be able to claim the tax back unless they have missed the deadline in the European country where they sustained losses."

Mr Campbell said there were several large companies in the North-East with claims in, but said under client confidentiality rules he could not name them.