Bord Gáis is facing a €50 million tax bill from the Inland Revenue in Britain after a High Court judgment in London resulted in a liability for the State-owned company.

The judgment relates to a €121 million lease agreed in 1993 between Bord Gáis and a subsidiary of Barclay's Bank.

Barclay's Mercantile Business Finance bought the subsea gas interconnector between Scotland and the Republic from Bord Gáis, which then leased it back.

Capital allowances claimed by Barclay's were disallowed by the Inland Revenue review body known as the Special Commissioners because they had not incurred the capital expenditure on the pipeline.

That decision was upheld on July 22nd by Mr Justice Park. While refusing the appeal, he said: "I do not regard the pipeline transaction as some sort of unappealing tax-avoidance scheme."

Even though the allowances were claimed by Barclay's, the liability falls on Bord Gáis. The effect of the financing arrangement was to reduce Bord Gáis's funding costs in respect of the interconnector.

Seven companies were involved in the transactions, among them a Jersey company owned by a charitable trust and Barclay's Isle of Man subsidiary.

The adverse ruling amounts to a significant setback for the company, although it is thought that the arrangements for paying the liability have not yet been discussed.

"The judgment is a surprising one and is contrary to legal and taxation advice received," said a Bord Gáis spokesman.

"Bord Gáis in conjunction with its advisers is assessing the commercial impact of the judgment and will be focusing on mitigating its liabilities."

Two options are believed to be on the table.

First, Barclay's Mercantile might appeal the ruling to the Court of Appeal. Any appeal must be taken by October 4th, it is believed. The basis for such an action is unclear as of yet, although there are suggestions by those familiar with the case that grounds for appeal might exist.

Second, Bord Gáis might attempt to reduce the liability through a settlement with the Inland Revenue. Again, the grounds on which such a settlement might be agreed are unclear.

An Inland Revenue spokesman declined to comment on the case yesterday, citing confidentiality.

In his ruling, Mr Justice Park said it did not follow that the Inland Revenue would not be able to disallow the allowances if the scheme was not a convoluted tax- avoidance transaction.

But while Barclay's claimed that the scheme was "standard commercial leasing", the judge did not agree. He said: "In a detailed way, the structure of this scheme is meticulously and imaginatively thought out. I am full of admiration for the drafting of the numerous documents which were required to implement it."

But he added: "I believe that, if one steps back from the details and reconsiders what they have all achieved, it does become apparent that the overall transaction was not 'standard commercial leasing' at all, and that it could not be taken for granted that the capital allowances would be forthcoming."

While the latest Bord Gáis annual report cites a liability of €50 million should the allowances be totally disallowed, a large part of that sum accrued due to interest. Between 1999 and the end of 2001, for example, the potential interest charge increased the liability by €10 million.

The company has a €1.3 billion capital programme to expand its network to the west of the State and build a second interconnector with Scotland.

Two months ago, Moody's and Standard & Poor's assigned stable credit ratings to the company but cited financial risks associated with large capital expenditure.