Prudential ruling on currency swap sets £1bn tax precedent

Insurance giant Prudential has lost a test case in the Court of Appeal which could collectively cost 30 of the UK’s largest companies £1bn in tax.

The companies entered into currency swap schemes in 2001 and 2002 and the terms of the schemes were set in an effort to generate a corporate tax deduction.

According to Bill Dodwell, partner of the tax policy group at Deloitte, the tax deduction gained was equivalent to the sum of cash the companies invested in the currency swap scheme.

Prudential was advised by Big Four firm Ernst & Young. Following the Prudential case, it is unknown whether the other companies that engaged in currency swap schemes will pursue their own court action.

Experts believe the companies would be likely to lose in further litigation with HM Revenue & Customs. Dodwell said: ‘I would’ve been very surprised if Prudential had won in the Court of Appeal. I think the other companies caught up in this would be best to accept the decision of the Court. Stephen Oliver and Theodore Wallace both delivered a joint judgment in the Special Commissioners, and it was highly likely the Court of Appeal would uphold this decision.’

A spokeswoman for HMRC confirmed Prudential’s appeal concerned its claim for corporation tax deductions for advance payments totalling £105m.

‘The High Court had earlier held that as the payments were of capital (currency) the contracts were outside the Finance Act 1994 regime and so no relief for the advance payments was appropriate. The Court of Appeal agreed with the High Court,’ she said.

A spokesman for Prudential confirmed the tax involved in the case was paid to HMRC in 2007 and that the group had noted the court’s decision and would be considering its options.

Before the introduction of the tax avoidance disclosure regime in April, Dave Hartnett, permanent secretary of tax at HMRC, said currency swap schemes would accelerate the introduction of such a regime.

A spokeswoman for Ernst & Young declined to comment.