(Photo: Reuters)
(Photo: Reuters)

The UK government is launching a legal challenge against the European Commission against the financial transaction tax, even though Britain did not sign up for the scheme in the first place.

In an application lodged at the European Court of Justice, UK Chancellor George Osborne challenged the European Union's decision paving the way for 11 eurozone countries to design a financial transactions tax that aims to discourage speculative trading and bolster public finances.

In a statement to the media, Osborne says "the UK launched a legal challenge to the EC's proposal for a financial transaction tax, which a number of EU member states wish to take forward through enhanced EU cooperation.

"We're not against financial transaction taxes in principle but we are concerned about the extra-territorial aspects of the Commission's proposal and I think that concern is shared by some other countries. So we have launched a legal challenge against the authorising decision."

So far 11 Eurozone members, including France and Germany, have signed up for the FTT, which is slated to be fully adopted by 1 January 2014.

It is expected that a stock or bond trade will receive a 0.1 percent tax rate, while a financial derivatives contract will receive a charge of 0.01 percent for every transaction.

The plan is similar in style to a so-called 'Tobin Tax', named after the economist James Tobin who originally conceived the idea in 1972 to apply to currency trading. Other adoptees of the proposal include Italy, Spain, Austria, Portugal, Belgium, Estonia, Greece, Slovakia and Slovenia.

Despite Britain opting out of the scheme, the UK and other non-participating members had until 18 April to mount a legal challenge against the FTT proposal specifics.

At the beginning of this month, a London Economics study commissioned by the City of London Corporation revealed that Britain faces paying £4bn (€4.7bn /$6bn) more in borrowing costs as a result of the FTT, even if it does not sign up to the controversial plan.

The study adds that the cost of firms raising capital will increase by 100 basis points or more in member states that do not subscribe to the tax because of reliance on debt capital markets.

"The financial transaction tax is an ill-conceived idea that risks significantly damaging economic prospects across Europe. Not only would it adversely affect the cost of sovereign debt but it would also make it more difficult for businesses across the continent to access funding," says Mark Boleat, chairman of the corporation's policy committee in the report, which links the extra yield investors would demand to buy UK government bonds with the extra costs they would incur to trade them.