Tarmac loses 'debt on security' ruling

Poor definition of a ‘debt on security’ lost Tarmac Roadstone Holdings its Special Commissioners appeal against tax on a capital gain of over #2m.

The conglomerate argued that a z6.5m loss it made on 12 loan notes, each worth #5m, to a US subsidiary in 1987 should be included in its chargeable gains for corporation tax. But the Inland Revenue’s claim that Tarmac’s debt was not a marketable investment, a key indicator of a debt on security, and did not qualify was accepted by the commissioners.

Price Waterhouse capital markets partner Richard Clarke said the ruling’s impact was lessened because of recent law changes. ‘It is of little relevance because foreign currency debts are now outside the capital gains regime, but I can see why Tarmac tried this. If I was a UK company lending money to a US subsidiary, I would try to make the money a debt on security so if it can’t pay me I would at least gain a tax loss. If it was a straight debt I would not get tax relief.’

Changes to foreign exchange legislation turned currency debts into ‘qualifying corporate bonds’ which are outside capital gains rules, said Clarke. Legislation introduced in April’s Finance Act also means foreign exchange gains and losses are taxed when booked on the accounts.