UK tax law ruled illegal by EU Court

To be fair this concerns a tax that will affect very few of us - stamp duty reserve tax (SDRT). The principle though has wide implications. The case in question involves HSBC which has just won what is predicted to be the right to a tax repayment of £27m after the European Court of Justice ruled that a tax [HMRC] has collected since 1986 is illegal.

It seems that elements of the law concerning SDRT have always been incompatible with EU law such that refunds will be available dating back to when the tax was introduced. In the light of this decision the government scrapped the tax on some share transactions yesterday after the European Court of Justice ruled it breaks EU law. The Telegraph reports that the UK Treasury (ie: the taxpayer) could be "forced to repay as much as £20bn to companies" as a result of this ruling.

One of the arguments employed in the battle against abusive tax avoidance and tax evasion is the rule of law. We should all comply with it. And of course we should. Equally so should the Government.

There are numerous cases however making their way to or through the European Court because the Government has not complied with European law - when framing or amending UK tax laws.

Where such allegations are made the cases are staunchly defended by HMRC on behalf of the Government. Many such cases are the subject of Group Litigation Orders - where a number of taxpayers claim that the UK law is incompatible with European law and thus the tax in question should not be paid or should be repaid to them.

As is well known I am no fan of abusive tax avoidance schemes. I am even handed however and am also disappointed when HMRC pursues cases that should never have come to court.

I'm no lawyer so would not presume to construct a legal test. However I do see a difference between those cases where:

• the EU law was not properly considered when the UK law was framed; and those cases where,
  
• after full consideration, the UK law was crafted in an effort to avoid the restrictions imposed by EU law.

Some might argue that the latter can be compared with contrived avoidance schemes and that consistent principles should be applied to deny both types of cases from having the desired impact - partly to discourage future such attempts to achieve the same ends. The alternative view, which I tend to prefer, is that it is perfectly proper for a sovereign state to want to retain the power to impose taxes and that to do so it has to examine the EU law to ensure that it is not breached. Occasionally the wrong conclusions will be drawn.

The real problem however comes when others take a contrary view and secure convincing legal backing for this. I imagine that HMRC does not want to have to admit that it's advice or parliamentary draughtsman made a mistake. Rather let the Court decide even in the face of compelling evidence. This ensures that the issue takes years to resolve even if it also costs hundreds of thousands of pounds in legal fees. My heart says this is what must happen in practice but my head tells me to believe that HMRC no longer pursue cases where they have been advised they have a less than 60% chance of winning. The sums involved in cases such as this however probably make the gamble worthwhile as the cost of fighting (even with only a small chance of winning) is so low - relative to the cost of losing or of giving in before going to Court.

In this latest case HSBC has won its case that the UK stamp duty reserve tax it was charged when it bought CCF, the French bank, contravened EU law. HSBC was fighting for, we are told, a refund of £27m. The full tax at stake - reports the Telegraph, could be nearer to £20bn. If this is right we should not be surprised that HMRC fought it all the way.

There have been other such cases in the past and there will be more in the future.