Vodafone Loses Tax Appeal with UK Tax Man

Vodafone has lost an appeal over a tax bill that could cost the firm as much as £2.2 billion, after the Court of Appeals overturned a ruling last year that had been in Vodafone's favour. The tax dispute dates back to when Vodafone launched its hostile takeover of Germany's Mannesman in 2000.

Under UK tax legislation introduced in 1988, the profits of a foreign company in which a UK company owns a holding of more than 50% (known as a controlled foreign company, or CFC) are attributed to the resident company and subjected to tax in the UK, where the corporation tax in the foreign country is less than three quarters of the rate applicable in the United Kingdom. The resident company receives a tax credit for the tax paid by the CFC. That system is designed to make the resident company pay the difference between the tax paid in the foreign country and the tax which would have been paid if the company had been resident in the United Kingdom.

The law has an exception that prevents a UK company using this specifically to minimize their UK tax liabilities. However, a court case won by confectionery and drinks group, Cadbury found that this breached EU rules, and hence also benefited Vodafone.

Last year, the UK High Court rules that Vodafone was correct in its interpretation of the law, but gave leave to the HM Revenue & Customs (HMRC) to appeal. They have now won that appeal and will re-open its investigation into Vodafone's tax liabilities.

Vodafone has set aside £2.2 billion should it lose the lawsuit, although the company had estimated its liabilities at £1.76 billion in its 2005 financial accounts.

Vodafone's CFO told Accountancy Age that the government needs to clarify the legal situation as the lawsuits are taking too long to reach a definitive conclusion. He also hinted that Vodafone could consider moving its registered office to another country if the legal situation is not sorted out.

Posted to the site on 24th May 2009