EC unlikely to spike Labour's windfall tax plan, say lawyers

Talk of Brussels spiking the Labour Party's planned windfall tax on privatised companies is "pie in the sky stuff", according to the UK's leading completion lawyer.

Malcolm Nicholson, head of Slaughter and May's EC and competition group, said it was "improbable" the European Commission would scupper Labour's plans and blamed the privatised companies for "stirring up" the situation.

Last week, stories in the national press quoted a European Union official who appeared to indicate that if Labour taxed only one company in a particular sector, BT for instance, it would give an unfair advantage to its rivals, such as Mercury Communications.

But Nicholson told The Lawyer: "Say BT is taxed and not its rivals like Mercury or AT&T. How is the European Commission going to run a case saying BT is unfairly disadvantaged, when it has a market share of 90 per cent?"

He added: "Brussels has got enough disagreements and difficulties with the UK at the moment, without picking a fight over indirect tax raising."

Nicholson said the privatised utilities that would be hit by the windfall tax were the ones which were "provoking" and "stirring up" the situation.

A senior official from the EU's competition directorate appeared to confirm Nicholson's opinion. She said: "A tax on a natural monopoly has to apply to all monopolies in that sector [for example regional water companies]." She added that non-monopolies in the sector could then be exempted from the tax.

But David Hall, head of Linklaters & Paine's EU and competition group, said Labour ought to take the problem seriously. "I would say there is an issue there," he said, adding that market share was a separate subject.

Linklaters acts for BT and for British Airways. Asked if this influenced his thinking, Hall declared: "The thought had not entered my head."

Another leading Brussels lawyer said that if the companies that could be taxed "kicked up enough of a stink, Karel Van Miert [the EC competition commissioner] would be forced to at least take the issue to the first stage of an investigation."

Michael Reynolds, competition partner at Allen & Overy, said: "While Labour's proposals could clearly fall into the category of state aid, it's not at all clear whether the commission would mount an action against the UK Government. It may find it just too difficult to mount a case."

Although Labour has said it will tax regional monopolies, such as the electricity and water utilities, the opposition party has yet to make it clear whether it will tax privatised companies with effective monopolies like BT or British Airways.