Reclaiming UK Corporate Taxes and Damages
Over the last 2 years, Dorsey's tax litigation group has been very busy reclaiming tax from the UK Inland Revenue on behalf of their clients. They have enjoyed great success and so far have recovered hundreds of millions of dollars. They are currently running a number of additional group litigation initiatives worth billions of dollars.
Who's doing it?
The current list of claimants reads like a "Who's Who" of the Fortune 500, with additional claimants joining the various groups on a regular basis. Many of the world's largest multinational companies are already involved in at least one case. The number and quality of the claimants makes the cost:benefit profile very attractive.
How is this possible?
It is really an issue of unequal treatment. Like all countries, the UK seeks to maximise its tax base. Reliefs and tax deductions are only made available where the corresponding income can be taxed in the UK. The UK will also seek to tax the worldwide income of its residents. Recent decisions have held, however, that the differential treatment of a cross border transaction from an entirely internal UK transaction exposes the companies involved to less favourable tax treatment which is in breach of the UK's obligations under international tax treaties and European anti-discrimination laws.
It is possible in the UK to bring actions for damages or restitution to compensate the taxpayer for the adverse tax consequences which result. The limitation period within which claims can be brought will go back at least six years from when the tax was paid (and perhaps even longer).
Who can claim?
The cases are relevant to multinational groups parented almost anywhere. The only essential requirement is that the company group has either a subsidiary or parent company resident in the UK that has paid UK corporation tax. Depending on the individual circumstances of each company group, it may be possible to enroll in one or more of the initiatives. Here is a sample list of popular circumstances which could give rise to a claim. Many other circumstances could qualify a claim.
- The company group also has a subsidiary in any other European nation and, in the same accounting period, the UK company made a profit and the foreign subsidiary made a loss. This will also include consortia (a "Loss Relief" claim).
- The UK company paid a dividend in the period before 5 April 1999. (The most relevant years would be 1997 to 1999 and the dividend was paid to another company in the group resident almost anywhere else in the world, an "ACT" claim.)
- The UK company received dividends, either from subsidiaries elsewhere in Europe or from portfolio investments in companies elsewhere in Europe (a "UK ACT" claim).
- The UK company received a loan or equity from another company in the group resident anywhere else in the world (a "Thin Cap" claim).
- The company group held or controlled its EU companies through a UK holding company and was therefore exposed to tax under the legislation relating to Controlled Foreign Companies (a "CFC" claim).
- The company group transferred assets from the UK subsidiary or parent to some other company within the group resident somewhere else in Europe.
- The UK company was owned by another company in the group resident in France or Germany, or there was a European holding structure, where the ultimate European holding company was French or German. For this case to apply, the UK company also had to pay a dividend in the period before 5 April 1999 (a "Treaty Credit" claim).
How much could my claim be worth?
As a rough guide to the levels of damages recoverable:
- ACT claims are worth at least 2% of any dividends declared in the period 1997-April 1999 and usually much more
- Thin Cap claims are worth about 31% of any interest deduction disallowance in the UK plus 31% of interest not paid (even if under an agreement with the UK Revenue) and 31% of capital invested or profit retained in the UK all in at least the last 6 years
- Loss Relief claims are worth approximately 31% of the European losses to the extent of UK profits being available to cover them
- Treaty Credit claims are worth 6.875% of the value of dividends paid in at least 1997 - April 1999
How does it work?
The initiatives are pursued by way of High Court claims under the umbrella of a Group Litigation Order ("GLO"). These resemble class action suits and involve a process where "test claimants" are chosen from the body of claimants to determine the main issues of the case. The "group" is made up of claimants with similar claims, and within the groups there are "classes" which further separate the individual fact patterns into easily manageable sub-groups.
The great advantage of a GLO is in the reduced costs, increased speed and more effective management of the claims. Claimant groups can comprise hundreds of participants and, because the costs of the litigation are divided amongst the claimants, the savings in fees are very considerable. There are also clear advantages in terms of minimizing publicity and collective settlement negotiations. Insurance against trial costs may also be available.
However, time is short and immediate action is required. The UK government has intimated that it may legislate to prevent the recovery of damages. Any such legislation could come into effect at any time, although the most likely date is sometime this summer. In addition, some of the initiatives mentioned above will shortly come to trial. Claims should therefore be issued as soon as possible. Issuing and serving your claims immediately will give you the best possible protection and maximize the chances and amount of recovery.