Revenue faces demerger tax challenge

An Inland Revenue ruling, which tax experts fear could reduce the appeal of demergers like that reportedly being discussed by Allied Domecq, is to be challenged in the courts.

Cigarette manufacturer the Gallaher Group has revealed that it is locked in a #130m tax dispute over its claim for tax relief on interest due on borrowings to fund its 1997 demerger from US-based Fortune brands.

The Revenue’s refusal to grant relief is understood to have been on the grounds that the borrowings were not ‘for the purposes of trade’ but were to fund the reorganisation of the business prior to the demerger.

Finance director Philip Burchill said: ‘The Revenue’s decision is a nonsense.

We asked for clearance which we did not get and there has been no discussion since.’

The company incurred #945m worth of debt in the demerger and Burchill said that the interest would be ‘very substantial’. Its results published this week had been prepared on the basis that relief would be granted.

The challenge has the backing of legal and accounting experts including company auditor PricewaterhouseCoopers as well as Fortune. The US company has promised to indemnify Gallaher for 50% of the potential tax bill, up to a maximum of #65m.

The Revenue refused to discuss the details of the case, but a Big Five tax expert said it was the first time the issue had been raised publicly since the law on interest relief was changed in 1996. Companies planning a demerger will follow the case closely, he said.

Related reading