UK court clears Bord Gais of tax liability

Bord Gáis received a significant fillip yesterday when an English court cleared the State company of a €50 million tax liability in Britain.

In a unanimous verdict, the Court of Appeal overturned a High Court ruling against a subsidiary of Barclays Bank, which had entered a €121 million lease with Bord Gáis in 1993. While capital allowances disallowed by the Inland Revenue six years ago were claimed by Barclays Mercantile, the liability fell on Bord Gáis.

The lease concerned the first gas interconnector linking the Republic with Scotland. The effect of the package was to reduce Bord Gáis's funding costs in respect of the interconnector, which was part-funded by the EU.

While it is open to Revenue in the next 30 days to seek leave to appeal the judgment directly to the House of Lords in London, the ruling removes the immediate threat of a major liability for Bord Gáis.

The potential bill faced by the company has increased significantly due to potential interest charges. It rose to €50 million last year from €40 million in 1999 due to the interest.

Seven companies were involved in the complex lease transactions, among them a Jersey company owned by a charitable trust and Barclays' Isle of Man subsidiary.

The successful appeal was the third attempt by Bord Gáis and Barclays to reverse Revenue's original decision on the allowances. A High Court challenge this summer followed an earlier appeal to a Revenue review body known as the Special Commissioners, which was dismissed.

The capital allowances claimed by Barclays were disallowed by the Special Commissioners because they believed the bank had not incurred expenditure on the pipeline. That decision was upheld by the High Court last July. The appeal judgment yesterday, which overturned both those rulings, followed a four-day hearing in mid-November.

Lord Justice Peter Gibson said: "In the present case the circular movement of money and the intention of Barclays Mercantile Business Finance to obtain and pass on capital allowances do not stamp the transaction as something different from that contemplated by Parliament as giving rise to an entitlement to capital allowances under Section 24 [of the Capital Allowances Act, 1990\].

Parliament has provided for capital allowances to be available on a purchase of plant of machinery, even though the plant or machinery is then leased and. . . the Revenue has long been aware of the practice of finance lessors utilising capital allowances through passing them on to lessees in the form of lower rentals."

Bord Gáis said the ruling vindicated its view that the finance lease it entered into with Barclays was a legitimate and tax-effective funding mechanism.

While the ruling refused Revenue permission to appeal the decision to the House of Lords, Revenue is entitled to seek leave to appeal directly to the House of Lords. A Revenue spokesman said it was too early to comment on the ruling. Officials were studying the decision, he said.