UK faces European court over taxation of foreign donations

The UK will be prosecuted in the European Court of Justice unless it stops discriminating against foreign charities, the European Commission has decided.

The commission warned in July 2006 that the UK's practice of denying tax relief on gifts to charities registered in other member states was contrary to the EC Treaty and contradicted the principle of free movement of capital.

"The rules of the internal market forbid discrimination against charities in other member states," Laszlo Kovacs, commissioner for taxation and customs union, said at the time. "Gifts to bona fide charities in other member states should get the same tax treatment as gifts made to domestic charities."

The UK was given two months to comply with the treaty terms, but Maria Assimakopoulou, spokeswoman for the Directorate-General for Taxation and Customs Union, told Third Sector that the commission had delayed proceedings because it was keen to work with the UK and several other member states that are in similar situations.

The UK instigated an informal meeting with the commission and other defaulting states on 12 November, but the parties failed to come to an agreement. Assimakopoulou said the commission would therefore resume infringement procedures. Exact timings should be decided before Christmas.

Infringement proceedings have started against Belgium, Italy and Ireland and are about to start against France and Denmark. The UK now faces prosecution unless it decides to change its law

A precedent was set by Germany in 2006 in what is now known as the Stauffer case. Italian charity Centro di Musicologia Walter Stauffer had derived rental income from its German property, which had been subject to corporate tax.

Simon Weil, a solicitor and partner at UK law firm Bircham Dyson Bell, said countries taken to the European Court of Justice were likely to lose. "I just don't see how, with the way the jurisprudence has developed, the court could possibly find in the UK's favour," he said.

Weil added that he would be amazed if the ?UK actually went to court: "At the end of the day, it is discrimination."

A spokesman for HM Revenue & Customs ?said: "We believe that our provisions are consistent with the requirements of EU law and have made this clear to the commission. We remain in discussion with the commission and other member states."

A spokesman for the Treasury said: "Decisions on when or if to take any case to the ECJ rest with the commission."

Cases already under way against Poland, the Netherlands and Slovenia are to be set aside after the countries agreed to change their legislation to comply with EU principles.

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