Russia Renews Tax Bill to Ousted British Offices

A court in Moscow has reinstated a £2.3m tax bill for the British Council, threatening a brief thaw in Russo-British relations.

The British cultural body's operation in Russia became the target of a Kremlin campaign last year in the wake of diplomatic skirmishes between the two countries following the murder in London of former KGB agent Alexander Litvinenko.

Its two regional offices were closed down in what the Russian foreign ministry admitted was a direct response to Britain's "unfriendly acts", leading to the extradition demand for Andrei Lugovoi, the businessman suspected of poisoning Litvinenko. Russia's president, Dmitry Medvedev, described the British Council as a "nest of spies" and the Russian head of the organization's alumni group was arrested on suspicion of industrial espionage in March.

A large tax claim later brought against the British Council was partly canceled by a court in October, raising hopes that bilateral relations were improving. However, on Thursday a higher appeal court ruled that the decision was invalid on a technicality, reinstating the tax demand and ordering a new hearing on January 28. A spokesman for the British Council confirmed the court decision. "Our lawyers are looking into the matter," he said, declining to comment further.

Specific figures have not been disclosed in court, but reports estimate that about 100m roubles (£2.3m) of tax demands have been reinstated.

The British Council has consistently claimed that it has complied with all legislation and that tax inspectors incorrectly estimated its tax burden. It says the closure of its branch offices was a breach of international law.

The canceling of most of its tax bill in October was welcomed by British diplomats, prompting the new ambassador, Anne Pringle, to say an agreement would be sought to allow the reopening of British Council cultural offices.

Shortly afterwards, business secretary Lord Mandelson visited Moscow, and lauded a new atmosphere of cooperation. He suggested that business partnerships in areas such as energy and nanotechnology and joint efforts to withstand the global financial crisis were bringing them closer together.

In an interview with the Guardian during the visit Lord Mandelson said the canceling of the tax debt was one reason to hope for a "thawing of the difficult political relationship that we have experienced".

That hope now seems to have been misplaced after Moscow's ninth arbitration appeal court revoked the lower court's decision, saying it was invalid because it lacked a secretary's signature. The case will now be reviewed afresh.

The British Council has kept a low profile since its two branch offices were closed in January. Last month its director Rosemary Hilhorst expressed hope that an exhibition of Turner paintings at Moscow's Pushkin Museum of Fine Arts would "show the mutual respect we have between our countries".

Alexei Mukhin, a political analyst in Moscow, said Thursday's court decision could be the result of a "genuine bureaucratic wrangle", saying that he suspects the British Council "will not have to pay these taxes in their entirety".