EU tax row is a bitter pill for politicians

A European court case brought by Cadbury Schweppes could force both Labour and the Conservatives to break their manifesto promises not to raise taxes, a leading accountancy firm said yesterday.

Blick Rothenberg warned that the Cadbury case, due to be heard in the European Court of Justice later this year, could end up costing UK taxpayers billions of pounds, whichever party wins the election.

Cadbury is bringing a test case against the Government over the way UK tax laws prevent multinational companies exploiting the different rates of business tax charged across the European Union.

Currently, the Inland Revenue does not allow multinationals to channel profits through subsidiaries in other EU countries where tax rates are lower.

In theory, businesses stand to benefit by declaring all their profits in the EU member state charging the lowest rate of corporation tax - in Ireland, the rate is just 10 per cent, for example, a third of the level charged in the UK. But unless companies can show that profits were actually generated in a different country, the Revenue demands tax on the income at UK rates.

Cadbury's legal team will argue that such regulations breach the company's right to organise its affairs within the EU as it sees fit. The Court will be told the Revenue's approach contravenes freedom of trade laws.

Steven Bruck, a partner at Blick Rothenberg, said the case could lead to a string of large companies seeking billions of pounds in tax refunds. "The tax figures on which all parties have based their projections could be completely undermined by decisions of the Court," he said. "How will each of the parties finance these potential major losses of government revenue, which are beginning to look ever more likely?"

The Cadbury case follows a similar dispute with Marks & Spencer, which was decided in favour of the retailer last year. Tax experts have since estimated that the M&S verdict will reduce government tax revenues by £1bn a year.

A spokesman for Cadbury confirmed the case was going ahead but said the company had not yet been notified of when a hearing would be held.