Cadbury’s tastes bitter tax defeat

The confectionary company used a scheme in 1994 marketed by merchant bank
Kleinwort Benson to attempt to convert an income stream into a capital gain,
which could then have been used to offset against capital losses within the

The £7.8m that tax inspectors said should have been recognised as income
would be likely to attract corporation tax at 30%. Tax advisers suggested that
that would allow the company to avoid tax of £2.3m.

There might also be other cases related to it, given the loans were marketed
by an investment bank. ‘It has probably been used by other people,’ said John
Whiting, tax partner at PricewaterhouseCoopers.

The scheme involved an unusual type of loan structure that involved the
finance company of Cadbury Schweppes issuing loans to its parent. The loan
notes, worth £150m, had unusual interest payment structures.

The interest structure of the loan was such as to mean it was outside
anti-avoidance provisions on accrued income, the legal argument turning on
whether the loans did, in fact, effectively fall within the rules.

Their sale before interest was due meant a capital gain and not interest
income, the company argued.

The company lost the case at the Special Commissioners, the High Court and
the Court of Appeal, the latest judgment in May. Cadbury is now considering
whether or not to petition for an appeal to the Lords.

A spokesman for HM Revenue & Customs said: ‘This decision confirms HMRC’s

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