In 1984 the Government introduced the “quoted Eurobond exemption”, this little-known regulatory loophole intended to make UK companies more attractive to foreign lenders looking to minimise their tax bills.
When a UK company pays interest to an overseas lender it would normally have to send 20 per cent to HMRC. The exemption allowed banks and other investors to receive the interest without the deduction if they lent their money through a “recognised” stock exchange such as the Channel Islands or the Cayman Islands.
Almost 30 years on, the tax benefits are being enjoyed not only by third-party investors, but by the owners of UK companies, who are using it to spirit profits through tax havens, while minimising – sometimes eliminating completely – the company’s UK tax bill.
The loophole is popular with private equity firms, which manage money given by pension funds and others to buy companies and then sell them off at a profit.
Instead of investing their money in the shares, or “equity”, of the companies they buy, they lend the money, often at very high interest rates through offshore stock exchanges.
Their newly acquired companies then take the yearly interest off their profits before they have been taxed in the UK, and reduce their tax bill accordingly. Often, the interest is not paid to the owners immediately but is accrued and added on to the original loan, increasing the amount taken off the next year. If the owners had invested the money in shares, any dividends they received would be paid after the tax had been calculated.
Many companies which use the loophole – and there are lots of them – say this is a legitimate form of investment; and there’s no doubt it is legal. HMRC considered restricting the exemption last year.
On wonders how serious the UK Government is on Tax Avoidance, or is the case as our previous blogs infer that large companies can get away with it as HMRC believes it can pick up the slack from SME companies and their owners.