M&S could gain �30m if it wins

If the opinion is approved by the European Court, the decision could cost the UK Treasury billions in taxes.

Advocate General Poiares Maduro said the UK retailer should be allowed to offset losses at foreign subsidiaries against the parent company's profit.

He said that the UK government had wrongly discriminated against M&S.

A European Court ruling is not expected until later in the year, but it usually follows the Advocate General's opinion. If it wins the case, M&S has said it would gain �30m.

Lengthy battle

"According to advocate general Poiares Maduro a group relief scheme which does not allow a parent company to deduct the losses of its subsidiaries established abroad under any circumstances is incompatible with community law," the European Court said in a statement.

M&S welcomed the reports saying: "We are encouraged by the Attorney General's decision and we await the European Court of Justice's decision later this year."

It's safe to say that the sums involved are really in the billions rather than the hundreds of millions Sean Finn, tax lawyer

Under current UK rules, a company can offset losses from one subsidiary against the profits of another - but only if both are inside the UK.

M&S made its original application for tax relief to the Inland Revenue in March 2000. The claim was rejected as the losses related to stores in France, Belgium and Germany.

After unsuccessful challenges, the company then took its appeal to the High Court, which referred the case to the European Court in May 2003.

More at stake

Adam Craig, head of EU tax practice at Deloitte, said the report was a "partial victory" for M&S.

But he added that the Attorney General's opinion had left room for member states to protect their losses.

The Treasury could see income cut

"The AG opinion says that the UK must give tax relief for foreign losses, but only if those losses cannot be used abroad," Mr Craig said.

"Governments will point out that in many circumstances the foreign losses can be used abroad and so, in practice, UK tax relief need not be given."

However, Sean Finn, a tax partner at law firm Lovells, warned a decision in M&S's favour could mean huge costs for the Treasury.

"The Treasury hasn't issued any official figures, but it's safe to say that the sums involved are really in the billions rather than the hundreds of millions."

He added that M&S was merely the "flag bearer" and other companies were waiting in the wings to take up similar cases, while the decision will also have implications across Europe.

Options

A spokesman for Germany's finance ministry said the Advocate General's decision "poses a potential risk for Germany's budget" if it is confirmed in a final ruling - as the government may have to pay back billions of euros to German companies.

Eight EU countries, including France and Germany, have backed the UK government in court, fearing they could also lose out if such a precedent were set.

Some EU countries, including Austria, Italy and Denmark already allow foreign losses to be offset against domestic profits.

If M&S does win the case later this year the government has "a number of options", Mr Finn told BBC Radio 4's Today programme.

It could abolish the profit and loss rule in the UK, raise taxes, or "really bite the bullet and embrace the possibility of having cross-border taxes".