HMRC clarifies bond-washing position

Finance | Gareth Jones | 1 Jul 2007

HMRC has stated that it will not be contacting any more charities or investment managers conducting business on behalf of charities as part of its investigation into bond-washing. It has also confirmed that contrary to reports elsewhere in the press, it will not be seeking penalties from organisations inadvertently caught up in the practice, which technically constitutes tax evasion. However, charities may face some liability for interest calculated on a daily basis in situations where tax was paid later than it ordinarily would have been.

Bond-washing involves selling a bond just before the interest or dividend is due, then buying it back within six months once the price has fallen. This can result in a profit for the purchaser and a capital gain for the original bond vendor.

The practice is deemed to be a form of tax evasion under legislation passed in the 1950s. However, charities' unique tax position means they gain no financial advantage from the use of fixed-interest investments, such as bonds, for tax avoidance. Earlier this year, HMRC approached a number of charities, charitable common investment funds and professional advisers to establish whether they had incurred, or their clients may have incurred, any liabilities under the bondwashing legislation.

There were fears that as a consequence hundreds of charities would face penalties and liabilities stretching back twenty years, which HMRC would be entitled to apply if it interpreted tax legislation as it stands correctly. Penalties of up to 100 per cent of the unpaid tax can be charged, although these can be mitigated for cooperation and full disclosure.

In practice, HMRC rarely reduces penalties below 10 per cent, so the decision not to pursue charities any further can be seen as a major victory for the sector, especially as HMRC is expected to act impartially between different classes of tax payers, for instance charities and commercial organisations.

Directory: HM Revenue & Customs (HMRC)

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