The much-dreaded M&S ruling in the European Court does not force Britain to rip up its tax law, it does not question the right of one member state top distinguish between resident and non-resident EU tax payers, and it should not drill a massive hole in the Treasury’s Budget.

But the judgment could trigger more expensive lawsuits and inflict a one-off hit to the Exchequer’s finances.

The Court has followed closely the opinion delivered by its advocate-general in April. That means that Marks & Spencer gets its money back, but not many others would be able to make the same claim. Companies cannot normally claim losses in businesses in other EU states against UK tax and the court has ruled that this is fair and can continue.

M&S had closed down loss-making subsidiaries, and therefore it could no longer claim tax relief in the countries where they operated. If the subsidiaries were still running, or if they were sold to another company that could use the tax losses abroad, then tax relief could be claimed in that other EU member state, at least in theory, so they could not be claimed against UK tax. M&S gets its tax back because claiming against UK tax is now a legitimate last resort.

The trouble with following the advocate general, however, is that his opinion raised unanswered questions. For instance, what happens if there is a time limit on the right to claim past losses against future tax, as is the case in many EU countries, when there is no such limit in the UK? If time-barred foreign losses could be claimed in the UK, the annual cost to the Exchequer might run up to £500 million a year.

Might the ruling create an artificial incentive for companies to cut their losses when they are trying to build up businesses in other EU countries? If it does, a well-meant tax judgment could discourage companies from building up pan-European businesses.

For the Chancellor, according to Kevin Phillips of accountants Baker Tilly, the biggest risk is how the UK courts interpret the implications of the EU Court ruling for past tax bills. Under current tax law, companies cannot claim losses on their EU subsidiaries simply because they are not UK companies, not because they could claim losses elsewhere. The court says that this is excessive, illegitimate and generally contrary to EU law.

If the UK courts follow that idea, then British companies could claim back billions. To avoid that, the Government would have to change tax laws retrospectively to comply with the European Court judgment, if it could.

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