HMRC Welcomes New Tax Avoidance Ruling

HM Revenue and Customs (HMRC) has welcomed a court ruling against an avoidance scheme that enabled two banks to avoid corporate income tax on interest on floating loan rate notes.

In this type of loan, the interest rate (and therefore the installment amount) fluctuates according to the rise or fall in the market interest rates.

One of the two banks, which were part of the same banking group, claimed at the Tribunal that no corporation tax was due on the quarterly interest it accrued on the floating loan rate notes, as the rights to that interest had previously been transferred to its offshore parent company. It was claimed that this meant that corporation tax was not due as the interest did not belong to the company.

When the rights to the interest were transferred, the bank had however built in a buy-back option to transfer the rights of interest back at any stage. Just days after a large interest payment was made to the offshore parent from the loan notes, the bank exercised this buy-back option. The buy-back was at a price which meant that the bank had retained the economic benefit of the interest payments, but it claimed not to be taxable on them.

Before the the First-Tier Tribunal, HMRC successfully argued that the interest payments were liable to corporation tax. The case involved a total tax liability of GBP16m (USD25m) but, in total, the ruling will protect over GBP86m, as four similar cases are pending, HMRC said.

David Gauke, the Financial Secretary to the Treasury, said: “This is welcome news for all those businesses and families who play by the rules. HMRC has successfully tackled yet another complex avoidance scheme, protecting substantial amounts of tax at stake and is sending a very clear message to anyone tempted – you won’t get away with it.”