UK - A pension fund has won the first round in a court battle with the Inland Revenue over a claim on share buy-back tax credits.
The Inland Revenue Special Commissioners - who adjudicate on tax disputes - found in favour of the Omega Software Group Pension Fund which was fighting a tax claim of nearly £100,000.
The Inland Revenue is to appeal the decision in the High Court, but if it is unsuccessful the decision will benefit around 100 other pension schemes also under investigation.
The funds in question all benefited from tax credits worth an estimated £200m for share buy-backs that took place between September 1994 and October 1996. Omega in particular participated in the buy back of Powergen shares between May and June 1996.
The Revenue argued that Omega had received an abnormal amount by way of dividend and thus had claimed an unreasonable tax advantage.
Omega countered that the sales were carried out in the normal course of making or managing investments and that its objective was not to seek a tax advantage.
The proceeds of buy-backs were once treated as a dividend for tax purposes until the then Chancellor, Kenneth Clarke, changed the law in 1996.
KPMG tax partner Steven Roth said: “The special commissioners' view on what is an abnormal dividend is a victory for common sense.
“I have always thought that the Revenue’s interpretation is far too narrow and hope that on appeal the High Court will reach the same conclusion. Many other cases will then almost certainly be dropped.”
Hammond Suddards Edge solicitor Francois Barker said: In the wider context, this decision may be helpful to pension schemes in so far as it supports a flexible view of what constitutes an investment from a legal perspective.”
“This is because only gains from investment by pension schemes are tax exempt. Gains from trading will be taxable, and schemes which engage in trading risk their tax exempt status.”
Barker added: “However, given the conclusion of the special commissioners that the Omega scheme did, in fact, derive a tax advantage from the buy-backs, it is not surprising that the Inland Revenue are appealing the ruling.
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