The British Inland Revenue is challenging an English court ruling last month that cleared Bord Gáis of a €50 million-plus tax liability in Britain.

The case relates to a complex commercial lease arrangement with a Barclays Bank subsidiary on the first Bord Gáis gas interconnector between the Scottish coast and Dublin. Bord Gáis's potential liability of €50 million at the end of 2001 was more than half its €89 million pre-tax profit that year.

A Revenue spokesman said the tax authorities went on Monday to the appellate committee in the House of Lords seeking leave to appeal a Court of Appeal decision last month. No deadline has been set for the committee's decision.

While the Revenue is pursuing Barclays Mercantile Business Finance, any tax liability will fall on Bord Gáis.

The case is unusual in that the British state is effectively pursuing an arm of the Irish State for tax.

There is an obligation on State companies to be exemplary in tax code compliance, and while availing of all legitimate arrangements, not to engage in "offensive" avoidance arrangements.

For example, documents released to The Irish Times under the Freedom of Information Act in relation to the sale to a management group of the Aer Lingus subsidiary, Futura, showed that a special holding company was set up to facilitate the takeover. This maximised tax efficiency.

When the Department of Finance learned of the arrangements, it warned Aer Lingus to ensure that the sale did not "cause any difficulties of an international nature".

In the Bord Gáis case, the Court of Appeal found in favour of Barclays in a unanimous ruling. Despite that, however, the Revenue's attempt to reverse that decision indicates its determination to proceed with the case.

The action comes amid renewed scrutiny by the British taxation authorities on tax avoidance. In a statement last week, Revenue chairman Mr Nick Montagu said it would be ruthless in its pursuit of offenders.

He said: "We will scrutinise artificial schemes very carefully to see whether they involve dishonesty land warrant prosecution."

While capital allowances disallowed by Revenue seven years ago were claimed by Barclays Mercantile, the tax liability fell on Bord Gáis when they were disallowed.

Bord Gáis's spokesman said: "At the outset of this whole process, the company said that, based on legal and taxation advice received, it felt justified in its tax treatment of this matter. That was vindicated in the most recent judgment."

In a highly complicated series of transactions in 1993, Barclays bought the subsea interconnector from Bord Gáis for €121 million and then leased it back. Seven companies were involved in the circular movement of money between Bord Gáis and Barclays, among them a Jersey company owned by a charitable trust and Barclays's Isle of Man subsidiary.

The allowances claimed by Barclays were disallowed by the Revenue because it had not incurred the capital expenditure on the pipeline.

The Revenue appeal body, known as the Special Commissioners, found that the transaction had "no commercial reality", the purpose of the expenditure by Barclays being not the acquisition of the pipeline but the obtaining of allowances. This resulted ultimately in a profit for Bord Gáis and fees payable to Barclays.

The High Court in London said last July that the transaction was "not standard commercial leasing" and it could not be taken for granted that the allowances would be forthcoming.

However, the Court of Appeal found that the circular movement of money and the intention of Barclays to obtain and pass on the allowances did not stamp the transaction as "something different from that contemplated by parliament as giving rise to the entitlement" in law.

While the ruling in the appeal refused Revenue permission to appeal the decision to the House of Lords, Revenue was entitled to seek leave to appeal directly to the House of Lords.

Should the House of Lords hear the appeal and should it find in favour of the Revenue, the potential bill faced by Bord Gáis is likely to increase from €50 million, the liability at the end of 2001. Due to potential interest charges, the likely bill faced by the State-owned company increased from €40 million in 1990.