Capital gains stand-off.

The Inland Revenue will lose its attempt on Monday to force insurers to pay annual income tax on high income bonds, according to the managing director of a leading insurance company.

David Wootton of Eurolife predicted that even if the Revenue went to appeal after Monday’s special commission, UK insurers are determined to beat the department.

An estimated £500m is at stake since the Revenue claimed a year ago that income tax should be levied annually on high income bonds. Currently capital gains tax is payable when the bonds mature.

Wootton believes that in changing its mind the Revenue has made it almost impossible for insurance companies to plan for the tax liabilities of new products.

‘We, along with a number of companies, have taken a lot of opinion – and it’s all consistent – that the Revenue has no case.

‘We are confident that the Revenue is going to lose and possibly give in,’ he said.

If the Revenue does win its case Eurolife already has clearance to pass the extra costs on to its customers.

Meanwhile the Revenue has clearly believes it has the right to ‘change its mind’.

In a statement about its proposed changes to the Life Assurance Manual, it said: ‘The department does not accept that having expressed a view on the application of the law it is bound to that view indefinitely.

‘If the department sees a need to change its published view because it no longer best reflects the law, it must do so.’

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The Revenue’s radical change of mind over taxing high income bonds has prompted calls for more ‘compliance mechanisms’, so the tax position of new financial products can be settled up front.

John Whiting, president of the Chartered Institute of Taxation, this week poured scorn on the Revenue’s attempt to impose annual income tax on the bonds instead of capital gains tax.

Whiting said: ‘We should agree these things upfront. You have to wonder whether we should have a greater compliance mechanism and we should look more carefully at this issue.’

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