The European Commission is threatening further legal action against the British government in a long-running case involving Marks & Spencer trying to reduce its tax bill because of losses incurred in continental Europe.

M&S retreated from France, Belgium and Germany in 2001, following losses made by its subsidiaries in these countries, and sought reductions to its main UK tax bill as a result.

The British Inspector of Taxes refused and the case was referred to the European Court of Justice (ECJ), which ruled in 2005 that UK law preventing transfers of losses to parent company accounts infringed European Union freedom of establishment rules.

Reforms to UK tax law followed, but the Institute of Chartered Accountants has argued that its "provisions are so difficult to satisfy that it will be almost impossible for any UK parent company to take advantage of them."

Meanwhile, legal action has continued in Britain, and prior to a ruling, Marks & Spencer told just-style it would not comment.

However, the European Commission has now threatened a further case at the ECJ, saying: "The legislation meant to implement the Marks & Spencer ruling, the UK imposes conditions on cross border group relief which make it virtually impossible for tax payers to benefit from the relief."

If it goes ahead, and wins at the ECJ, the UK government could face massive daily recurring fines of EUR1,000s until it allows M&S and others to more easily reduce tax bills because of foreign EU-based subsidiary losses.