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

According to Bill Dodwell, partner of the tax policy group at
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.

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