British taxpayers will lose at least £9.7 billion due to rulings by the European Court of Justice. Commentators on the HSBC SDRT case have suggested that it will cost up to £5 billion, the UK Government's estimate for the FII GLO case is that it will cost taxpayers another £4.7 billion, and the estimated total of those (£9.7 billion) does not even taken into account the Thin Cap GLO or the Cadbury Schweppes CFC tax cases, both of which the Government is currently fighting in the courts.
Yet these tax blows to the nation’s finances, coming at a time when the Government is struggling with our huge national debt, could have been prevented. However, Ken Clarke and his successor, Gordon Brown, as Chancellor failed to act on advice to amend EU tax rules. Now the only option to protect British tax law from EU interference is for the UK to regain its freedom.
Sensational evidence produced in a recent tax case1 shows that Ken Clarke, when he was Chancellor of the Exchequer, failed to defend the UK’s tax rights, despite clear warnings from Inland Revenue officials that the ECJ would erode the UK's tax base. Furthermore, it is highly likely that his successor, Gordon Brown, also failed to act. Warned, as early as 1994, that the only solution was for the UK to obtain clear tax exemptions from the EU, then either from incompetence or neglect, Clarke ignored advice, probably also given to Brown, to seek changes that could have saved the UK Exchequer billions.
It is scandalous that the advice of Inland Revenue officials to seek a Treaty carve-out for tax, has been ignored by successive governments. It is clear that the approach of Ken Clarke and Gordon Brown has cost the UK Exchequer £billions as HMRC now loses tax case after tax case on EU law, when if the officials advice had been followed these cases may not have arisen.
The Labour government claims to have secured a red-line protecting the UK from the EU taking power over taxation. The evidence now shows that it waved a white flag.
In Test Claimants in the Thin Cap Group Litigation v Commissioners for Her Majesty’s Revenue & Customs  EWHC 2908 (Ch) evidence was produced that showed disregard by Ken Clarke of official advice that the UK’s tax powers were under threat.
Actions of the Treasury under Ken Clarke’s Chancellorship
In July 1994, a policy memorandum from a senior Inland Revenue official, headed “EC: Direct Tax: European Court of Justice” outlined the issue as “Early warning of problems ahead with the Court of Justice applying the principles of the Treaty to national tax provisions”.
The summary of that memorandum states the following:
“There is a growing risk of a major setback in Exchequer and political terms”;
“In so far as there is any comprehensive solution to this problem the only [our emphasis] option worth serious consideration is a Treaty revision with the objective of securing tax carve-outs in the relevant Articles.”
“Short of amending the Treaty there are very real limits to what can be done at national level to reduce the potential for damage”2.
And that the cost could run into:
“hundreds of millions if not billions of pounds”.3
The same Inland Revenue expert added in August 1994 that:
“The vulnerabilities of ourselves and indeed other Member States run to the length of a ball of string.”4
It is clear that the Financial Secretary at the time, Sir George Young, clearly understood the danger, as outlined in an October 1994 note to Ken Clarke where he wrote:
“But this, I fear, is only a minor example of the problems we will face in dealing with the Halliburton decision, and other major ECJ decisions in the future.”5
Young further wrote to Ken Clarke on 1st November 1994, referring to the risks of judicial lawmaking by the ECJ in taxation, and strongly recommended that the issue of the ECJ overriding UK tax law be made a priority for the UK agenda for the 1996 Inter Governmental Conference. He wrote:
“since Treaty revision is the only long-term solution”.6
Less to his credit, the Financial Secretary did also recommend keeping the issue off the political agenda, due to “avoiding shock/horror politicking from the Eurosceptical tendency in Parliament”. Not only did this ignore the fact that the Eurosceptics would have been proved right, it reduced the UK’s chances of getting the momentum required, both in the UK and abroad, to force the necessary Treaty changes.
Actions of the Treasury under Gordon Brown
Amazingly, the disclosures made in the Test Claimants tax case cover no discussion of such issues between July 1997 and February 2001, a period during which only Gordon Brown was Chancellor.
Questions have to be asked as to why there was no evidence in the case covering this period. During this period the ECJ ruled on a number of cases, including at least one UK case7, which made clear to the tax community that EU law is being used to force through tax harmonisation via the back door8. There was a major UK House of Lords case, where ICI successfully argued for greater tax relief, because of EU rules.9
Given that litigation, it is highly unlikely that at no time during those 4 years, did Treasury or Inland Revenue officials provide a briefing to the Chancellor of the Exchequer on matters clearly identified in 1994 as having a detrimental impact to HMRC. And its highly unlikely that such briefings did not make the same recommendations as in 1994, to seek treaty amendments, recommendations which if made public will be highly embarrassing to the now Prime Minister.
Test Claimants in the Thin Cap Group Litigation v Commissioners for Her Majesty’s Revenue & Customs  EWHC 2908 (Ch):
Ibid, paragraph 269
Ibid, paragraph 270
Ibid, paragraph 272
Ibid, paragraph 283
Ibid, paragraph 290
Metalgesellschaft Ltd & Others v CIR, CJEC Case C-397/98; Hoescht AG v CIR, CJEC Case C-410/98, TL 3686;  STC 452;  2 WLR 1947;  All ER (EC) 496
Including Futura Participations, Compagnie de Saint-Gobain, Royal Bank of Scotland v Greece, Verkooijen – all well known in the tax community when published
Imperial Chemical Industries v Colmer, HL 1999, 72 TC 1;  STC 1089;  1 WLR 2035;  1 All ER 129. See also Metalgesellschaft Ltd