British Gas sues Government for pounds 1bn

Embattled group files writ over tax payments

British Gas yesterday filed an unprecedented pounds 1bn writ against the Department of Trade and Industry to claim back taxes which it said it should never have paid.

The company fiercely denied suggestions that the audacious legal move was an attempt to lessen its difficulties over the pounds 30bn-worth of so-called take-or-pay contracts with other gas producers.

The DTI responded by issuing "protective writs" against the 27 oil and gas companies which are the subject of some of British Gas's oldest contracts, written as long as 30 years ago. Little warning was given about the legal action, but the DTI immediately made it clear that the Government did not accept the validity of the claim .

This is the latest episode in British Gas's battle to protect millions of privatisation shareholders, or "Sids", who have watched the share price slump by a third over the past year alone. Apart from the simmering take- or-pay problem, British Gas is facing the likelihood of a Monopolies and Mergers Commission investigation over its acrimonious row with the industry regulator, Ofgas.

The gap between the two sides over a controversial price formula, which would cut revenues from the pipeline business, Transco, by up to 28 per cent appears as wide as ever.

The legal claim relates to the gas levy, a tax created by the Conservative Government in 1981 to make up for the fact that existing contracts to buy North Sea gas were exempted from petroleum revenue tax. This came into effect in 1975, and is levied on production profits made by oil companies. The legal action by British Gas was the result of research by its in-house lawyers and the firm of Ashurst Morris Crisp, who had discovered what amounts to a legal loophole when examining one of the pre-1975 contracts last year. By Christmas they had widened their investigation into other contracts which pre-dated the introduction of PRT. Some had been amended so many times that British Gas's lawyers believe they had ceased to have any legal validity.

Technical provisions in the Gas Act 1986, which provided the framework for privatisation, created doubt about who these contracts apply to. The 1986 legislation suggest the gas levy could be paid by "other parties". It was subsequently amended in 1990 to suggest, in effect, that if British Gas itself was not liable, then the producers who sold the gas should be.

In a statement the DTI explained its counter-writ against the producer companies, which include BP, Esso, Mobil and Shell. "The DTI does not believe that British Gas's interpretation of the law is correct. However, it cannot ignore the risk, however small, that British Gas may prove to be right. If British Gas were proved to be right, then the Government would have levy claims against producers of the gas in question."

British Gas issued the writ in the High Court yesterday, but it has yet to be formally served on the DTI. The company has up to four months to serve the writ. In a brief announcement the company said: "We are pursuing directly with the DTI the legal position. Accordingly, pending the outcome of the process, no decision has been made as to whether or not to pursue these proceedings."

Analysts suggested that this was an attempt to pressure the Government into abolishing the levy - 4p a therm - and amounting to about 1p a therm on consumers' gas bills. Levy payments have decreased over the past 10 years as the fields come to the end of their lives. At its peak in 1985/6 British Gas paid pounds 525m. Last year the levy was worth pounds 150m, and it is estimated that over the next decade it could earn the Treasury around pounds 1bn. Since 1981, the gas levy has netted the Government pounds 5.6bn.

But there was doubt about the possibility of further negotiations taking place. In a letter sent by the DTI to the firms affected by its protective writ, it said there were "no plans to enter into negotiations with BG".

The companies affected were equally taken aback by the DTI writs. BP said it was considering the matter, but could not yet make any comment. Other firms said many of the directors who needed to be informed were on holiday.

Although the DTI did not accept British Gas's arguments, analysts suggested they must have some legal strength. Simon Flowers from Nat West Markets said: "They wouldn't have gone to the trouble of issuing a writ unless they genuinely believe there's a reasonable legal case."

The claim is unlikely to come to court, but should British Gas gain a billion pound windfall, it may not be distributed to long suffering "Sids". The Gas Consumers Council argues that British Gas promised seven years ago to give any reductions in the levy to constomers. Ian Powe, the council chairman, said: "If British Gas wins, we shall remember its earlier promises."

The legal move helped to boost British Gas shares, which gained 2p to 193.5p.

Comment, page 19

Levy paid since 1981

Year Amount

pounds m

1981/82 383

1982/83 471

1983/84 522

1984/85 500

1985/86 525

1986/87 515

1987/88 502

1988/89 407

1989/90 335

1990/91 291

1991/92 282

1992/93 287

1993/94 240

1994/95 175

1995/96 150

Total 5,585