'Tesco tax' faces legal challenge

• Under pressure: finance secretary John Swinney Photograph: Neil Hanna

House of Fraser, the owners of Jenners, is threatening to go to the European Courts if ministers press ahead with the measure, following legal advice that EU countries cannot "play favourites" by penalising one form of business over another.

The Scottish Government plan to impose an extra sum on the rates paid by all stores with a rateable value of more than 750,000 has prompted a major backlash from the senior figures in the retail industry. Although dubbed the "Tesco Tax" it will not only hit supermarkets but also out of town retail parks and department stores in the country's main shopping streets. Last night, Labour called for ministers to put the plans on hold, as objections among the business community grew.

House of Fraser's chief financial officer Mark Gifford said retailers understood that the Scottish Government needs to "balance the books" but said his lawyers had advised him that the levy "could be challenged in European courts". He said: "If we can't influence the parliament through engagement, we may lodge a formal challenge as a group of retailers."

Charles Livingston, an associate at law firm Brodies, said: "The EU does not allow governments to 'play favourites' with participants in a competitive market. There is a ban on what is known as 'state aid' - the state favouring one business or group of businesses over their competitors."

Livingston said a complaint by a retailer to the EU would automatically trigger an investigation into whether the policy qualified as state aid.

If the EC found it breached European treaties, the Scottish Government could be ordered to pay back the tax or even raise taxes on small retailers to "even the playing field".

"The point is, all state aid should be notified to the commission. If it isn't, and it is state aid, the court can suspend the scheme," said Livingston.

Gifford confirmed that the levy would cost House of Fraser an extra 500,000 across its three city-centre stores in Buchanan Street, Glasgow, the West End of Edinburgh and Jenners.

He said: "We are not going to close Jenners or House of Fraser in Glasgow. It is not that extreme. But we are beginning to look at new openings. This is more likely to impact on new jobs because they are much less viable than they were. I don't want to start threatening, but we would like to ask the parliament to think this through," he said.

The tax is likely to be a major issue this week as MSPs meet to debate the Government's budget plans for the next financial year.

The Conservatives and Lib Dems, whose support the SNP is likely to require if the budget is to pass, are opposed to the tax and have called on ministers to withdraw it.

However, Labour last night held out an opening to ministers, saying they wanted to discuss a "revised proposal".

Labour's finance spokesman Andy Kerr said: "John Swinney admitted that he had not consulted those most affected, and at the very least he needs to engage with the business community about the fairest way of introducing a levy and come forward with a revised proposal to plug the hole in his budget."

A spokesman for the Scottish Government said yesterday that it would press ahead as planned. "The reality is that by raising 30 million from only the very largest retailers - or 0.1 per cent of business properties - we can provide more investment in economic recovery and local services, from which almost all businesses benefit."

Ministers say that more than 90 per cent of the 30 million will come from the largest supermarket branches or out-of-town retail parks. They also point out that the sum is a "drop in the ocean" compared to the UK Government's VAT increase, expected to raise an extra 1bn from consumers in Scotland.