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Big British companies from the London Stock Exchange Group to broadcaster ITV are set for an unexpected £700mn windfall after the UK won an appeal against a Brussels state aid clampdown that had forced London to collect tax against its wishes.
HM Revenue & Customs is refunding the companies after a September ruling reversed a 2019 decision by the European Commission that a British tax exemption for corporate groups using overseas financing companies amounted to illegal state aid.
The European Court of Justice decision was a blow to European antitrust boss Margrethe Vestager, who has pushed for a “level playing field” on taxing multinationals.
It also leaves the UK government with a £700mn bill to repay big companies at the same time as Sir Keir Starmer’s Labour administration is increasing taxes and attempting to plug a hole in the public finances.
Pearson, the media and education group, stands to be one of the biggest beneficiaries, with the prospect of recouping £105mn after the UK government successfully appealed against the 2019 decision. It said this cash will be returned “at some point in the future and we will release the related £63mn tax provision in 2024”.
LSEG paid £11mn to HMRC following the Commission’s 2019 decision and had a total potential exposure of up to £65mn, according to its most recent annual report, which was published before the court ruling. LSEG said it welcomed the judgment.
Other beneficiaries from the ruling include ITV, the UK broadcaster, which stands to receive a tax refund of about £10mn, according to a person close to the group. ITV declined to comment on the ruling.
Figures released by the Office for Budget Responsibility alongside chancellor Rachel Reeves’ October 30 Budget confirm the ruling is expected to cost the exchequer £700mn in the current tax year.
The ECJ ruling was the final stage in a years-long legal battle that began the year before the UK’s exit from the EU when Brussels moved to clamp down on what it saw as illegal state aid to British-based multinationals.
The dispute centred on UK rules that clamped down on companies reducing their tax bills by shifting profits to “controlled foreign companies” — foreign subsidiaries controlled from Britain.
The regime included a tax exemption for overseas financing companies used by large corporate groups to fund their operations. The loophole was brought in by former chancellor George Osborne to encourage large companies to set up their head offices in the UK.
The Commission argued that this exemption — available from 2013 to 2018 — amounted to illegal state aid, forcing the UK to collect the tax against its wishes.
But the decision was challenged by some of the companies affected, with the backing of the UK’s previous Conservative government. Their argument was rejected by the EU’s general court before being accepted by the final appeal court in September. The European court had jurisdiction because the exemption applied while the UK was still an EU member state.
It is the latest example of a country making a legal argument that it is not required to collect tax as governments attempt to attract multinationals to their shores through generous tax regimes. In another September ruling, Apple was ordered to pay Ireland €13bn after the ECJ rejected arguments by the iPhone-maker and Dublin that the company had not received a sweetheart tax deal.
FTSE 250 groups Chemring and Inchcape and former FTSE 100 aerospace and defence group Meggitt were among the large UK groups previously reported to be affected by the Commission decision in 2019.
Chemring and Inchcape declined to comment on whether they were in line for a refund from HM Revenue & Customs. Meggitt, now called Parker Meggitt after a 2022 takeover, did not respond to a request for comment.
HMRC declined to comment on the number or identity of the companies affected by the ruling.