British American Tobacco wins tax ruling

British American Tobacco (BAT) has said that it could be awarded £1.2 billion of taxes back after a High Court judge ruled that it had overpaid.

BAT is Europe's largest cigarette maker. The company said that a preliminary judgement has found it should not have paid UK tax on dividends received from European subsidiaries. The judge has ruled that HM Revenue and Customs must refund the tax paid on the dividends, along with other bills. BAT's most well known brands include Dunhill and Lucky Strike. The company said that the exact amount of its claim would be known after a further hearing. 

The Treasury said it would consider the case before it finally decides on whether to appeal. BAT said that if the Treasury files an appeal, either with the European Court of Justice or Britain's Court of Appeal, the process could take up to four years.

During the current week's pre-Budget report, the UK government has abandoned a plan to tax British companies on profits generated overseas. Chancellor Alistair Darling also said dividends of companies' overseas subsidiaries would be exempt from tax starting next year.

The UK's current laws stipulate that if a UK-resident company receives dividends from a subsidiary that is also a UK resident, it is not liable to pay corporation tax. However, if a UK-resident company receives dividends from a subsidiary based abroad, it is liable to pay corporation tax on those dividends. 

The European Court of Justice, in 2006, had ruled that the tax rate applicable to foreign-sourced dividends should not be higher than that applied to nationally-sourced dividends. Thereafter, the case was handed back to the High Court. 

Justice Henderson said that the final sum that could be claimed from HMRC could be as much as £5 billion. In his 150-page ruling, the judge said that almost without exception, ''these issues are both difficult and important, and huge amounts of money are potentially at stake'' He said that ''I was told that the maximum amount of the claims is of the order of £5 billion.''

Since the verdict applies to any UK company that paid tax on dividends from foreign subsidiaries from 1973 onwards, the implications could be fairly large. BAT's case was more of a test case for 20 companies with similar claims, and was backed as its circumstances were much more complex than that of the others. Reports quoted partners at management consulting companies as saying that the judgement has made it crystal clear that the UK's dividend taxation rules breach EU law, and have opened the floodgates for massive tax rebates.

Reports also said that parties in a legal dispute usually receive a copy of the judgment around two weeks before it is made public. That would mean that Chancellor Darling and his advisers were aware of the High Court's view on their foreign dividend policy while preparing the Pre-Budget Report, where they have chosen to jettison tax on foreign dividends as a major policy shift in the Pre-Budget Report earlier this week.