Bank of Ireland unit to pay £27m after tribunal defeat

Bank of Ireland unit Bristol & West will have to cough up £27m in corporation tax after a tribunal ruled for the second time against a scheme involving derivative swaps that the former building society used to avoid paying corporation tax.

Bristol & West transferred interest rate swaps from one group company to another for £91m, in an attempt to take advantage of a change in the regime for taxing derivatives that it believed would mean any profit on such a transaction was disregarded for tax purposes.

HMRC said the assumption that the credit would disappear because one of the companies involved in the “in the money” interest rate swaps was within the new regime while the other was not was incorrect and amounted to an attempt to avoid paying tax.

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HMRC had earlier won a case in the First Tier Tax Tribunal against Bristol and West in May 2013, but an appeal was allowed to the Upper Tribunal over a technical point that a ‘closure notice’ had been mistakenly sent out by the Revenue.

However, the Upper Tribunal agreed with HMRC that the perceived loophole did not exist and the scheme did not work, allowing HMRC to collect the tax due in subsequent years.

The Upper Tribunal said the Bank of Ireland subsidiary transferred interest rate swaps to another Bank of Ireland subsidiary purely in the hope of securing a tax advantage. A further £215m was recouped when other followers of the plan settled before being taken to tribunal.

David Gauke, Exchequer secretary to HM Treasury, said: “This case is the result of HMRC’s relentless work against a highly complex and speculative avoidance gamble that, unchallenged, would have deprived the country of over £27m in corporation tax.

“HMRC has shown that, no matter how complex or intricate the case is, it will not hesitate to litigate when the rules are being abused.”