The Inland Revenue, the U.K. tax authority, is cracking down on institutions using derivatives to reduce the amount of tax they pay on their revenues. The Revenue is expected to highlight cases in which corporates have used structured securities to convert income into capital in a Finance Bill due to be published on Thursday as DW went to press in the holiday-shortened week.
The structures convert revenues into a series of interest-like payments, but because the instrument is structured as equity the institution only pays tax on capital gains, of which they might be none.
Accountants said the Revenue is aiming this broadside at banks and financial institutions, which invest in synthetic debt instruments, including preference shares and equity-linked loans, through their subsidiaries. Under current rules the subsidiaries are exempt from tax on dividends. The Revenue introduced the rules in 1997 and said it would change them if it believed institutions were abusing them.
Officials agreed the Revenue's decision is a fair move because the trades are not in the spirit of the rule. The decision, however, may lead to some corporates unwinding positions. Accountants said it was impossible to say how far reaching the move could be, but suggested the Revenue will likely come up with a list of specific trades or instruments that it will no longer permit.
