EU tax bill for U.K. firms faces no-deal Brexit conundrum

A no-deal Brexit could create yet another headache for the European Union as it prepares to hand dozens of U.K.-based companies a tax bill that is expected to top $1.5 billion.

With just over two months until Britain’s scheduled departure date of March 29, time is running out for the European Commission to order the U.K. to recoup money from companies granted illegal tax breaks. A decision is likely just before Brexit, people familiar with the case have said. But how the EU could ensure U.K. compliance with any order isn’t clear.

“The issue is not the chance of an appeal,” and which court would hear it, “but how to actually enforce a decision taken just before the Brexit date,” said Raymond Luja, a tax professor at Maastricht University in the Netherlands. “What if the U.K. simply would ignore it?”

A sign reading 'Passport Control' hangs from padlocks attached to Westminster Bridge as the Houses of Parliament stands on the bank of the River Thames in London.
A sign reading 'Passport Control' hangs from padlocks attached to Westminster Bridge as the Houses of Parliament stands on the bank of the River Thames in London, U.K., on Tuesday, Jan. 22, 2019. The U.K.’s main opposition party is backing a plan that could open the door to a second European Union referendum, bringing the possibility of stopping Brexit a step closer. Photographer: Luke MacGregor/Bloomberg

A no-deal Brexit would mean the withdrawal agreement and transition period negotiated for months toward an orderly EU exit, wouldn’t apply. The U.K. and its two judges would cease to be part of the European Court of Justice in Luxembourg, raising questions of how the EU could enforce court decisions on a country that’s left the bloc.

Biggest Firms

Fifty-three companies, including Diageo Plc, Pearson Plc and Compass Group Plc, have warned of potential costs arising from the EU probe, according to data compiled by Bloomberg Tax. Twenty-three of those, among the U.K.’s 250 largest firms, have disclosed potential tax repayments amounting to about $1.5 billion.

Amid a crackdown on loopholes designed to help big companies, EU Competition Commissioner Margrethe Vestager opened an in-depth investigation in October 2017 to uncover whether firms unfairly profited from a U.K. tax break. Like Ireland’s battle over whether Apple Inc. owes unpaid taxes, the commission could force the U.K. to recover any windfalls.

The case is one of the EU’s last to target the U.K. before Brexit day. The EU in December concluded a separate probe into corporate tax deals in the British territory of Gibraltar, with an order to reclaim some 100 million euros ($113 million) in tax breaks.

Normal Circumstances

Under normal circumstances, the U.K. would have two months to appeal any decision in EU courts. An order made before the end of March would remain valid and the U.K. would likely be able to appeal it, even as a non-EU member, lawyers said.

But these are not normal circumstances.

“The U.K. might indeed just ignore the whole thing,” said Howard Liebman, a tax partner at law firm Jones Day in Brussels. Given the uncertainty, he said he can only speculate. “It may decide, depending on what happens to the U.K. government itself, not to lodge an appeal and simply say, we’re out, and this decision doesn’t impact us. Then what?”

Ignoring an EU ruling might be counter-productive, especially if the U.K. wants agreements on possible future trade deals.

‘In Step’

“Keeping U.K. and EU competition rules ‘in step’ is, in any case, generally seen as a prerequisite of a future trading agreement,” said Jeremy Cape, a partner at law firm Squire Patton Boggs in London.

The commission has to revert to the EU courts when a government fails to comply with a decision or court ruling. Such disputes can already drag out for years. How that will work post-Brexit isn’t clear.

“If the EU wins before the court and then wins again as part of any appeals, what can the EU or the European Courts actually do to force the U.K. to comply?” said Liebman. “I do not believe there is any enforcement mechanism available.”

The Brussels-based commission declined to comment on the U.K. case.

The U.K. Department for Business, Energy and Industrial Strategy referred to August guidance, which confirms that the Competition and Markets Authority will take over from the commission if there’s no deal, while existing approvals of state aid will remain valid and “carried over into U.K. law.

The CMA said that as part of preparations to take on the state aid function, it is “monitoring state aid cases currently with the European Commission which may eventually come under CMA jurisdiction when the U.K. leaves the EU.” It declined to comment on the EU tax case.

The U.K. watchdog has said it aims to follow a similar state aid framework to the EU’s, so its decisions “in theory” could be similar, said Nicole Robins, a partner at economics consultancy Oxera in Brussels.

The U.K. case tops the previous EU record, an investigation into a Belgian tax plan that benefited 35 businesses and led to a 2016 order to the government to recover about 800 million euros in back-taxes. The EU’s U.K. probe looks at an exemption that enabled parent companies to pay little or no tax on intra-group financing between units based outside the country.

While several forums could come into play, including the International Court of Justice in The Hague, to sort out disputes over non-compliance with an EU order, “the bottom line will remain enforcement,” said Luja.

— With assistance from Penny Sukhraj, Hamza Ali, Jonathan Browning and Jessica Shankleman