Uncertain tax climate leads to drastic measures

As Gordon Brown was busy making his pre-Budget report speech last December, the Inland Revenue was issuing documentation relating to its own PBR actions. Included in this ream of information were 70 pages of innocuous-looking draft legislation on the tax implications for companies switching to IFRS.

But the most important revelation was the Revenue’s decision to defer the tax effects of transitional adjustments to IFRS until their tax impact was clearer.

Some welcomed the news that the taxman was taking more time over this decision. After all there was, and still is, a great deal of uncertainty over financial instruments standard IAS39.

But with the body basically admitting it is still not certain how the new regime will work in the UK, companies have been caught in a state of flux.

Derek Jenkins, tax partner at PricewaterhouseCoopers, says that ‘companies won’t know whether items in their IFRS accounts will be taxed or relieved until an announcement is made in the pre-Budget report of 2005’. This, in many cases, will be after accounts have been published.

This lack of clarity has prompted a number of those moving to IFRS to take drastic measures to avoid damage to specific areas of their accounts.

Property company Capital & Regional, which is responsible for entertainment business Xscape, announced this month it would buy back its convertible debt for the second, and possibly not the last, time.

It spent £27m reacquiring 28% of its convertible unsecured loan stock, having spent £12.4m in November on a similar move.

Under UK GAAP, the company can offset these loans against tax, something it may not be able to do under current IFRS draft legislation.

To be able to do this, C&R moved its year-end date from 31 December to 30 December. This ensured that its current financial year’s accounts would still be taxed under UK GAAP rules, regardless of what the Revenue decides on IFRS.

It also gives C&R the opportunity to buy back more loans over the course of this year, without worrying about the tax treatment.

Changing an end of year date is not done lightly, but as C&R financial director William Sunnucks explains ‘the economics of the situation overcame the presentational issues’.

Companies involved in joint ventures are the most likely to suffer from convertible debt issues. But those that entered their 2005 financial year on 1 January have unfortunately missed out on the opportunity that C&R grasped.

Others may consider chances to buy back any convertible debt they can before their current financial period finishes.

Failing this, many will be hoping that the Revenue changes its stance on tax in this area, something it has promised to review this year. But this in itself is a risky stance. With an election expected in the late spring, there are no guarantees.