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Underpaid tax drops as HMRC clamps down on misuse of financial instruments by large UK firms

HM Revenue and Customs (HMRC) has reported a 67% drop in the amount of tax that it suspects big UK businesses of underpaying through the misuse of complex financial instruments, according to figures obtained by Pinsent Masons, the law firm behind Out-Law.com.

The figures relate to the suspected use of financial instruments such as convertible loans and debt instruments to create a deduction from taxable profits in one part of a corporate group without a matching profit in another part of the same group. According to HMRC, the amount of tax at risk fell by 67% last year, from £2.1 billion in 2012 to £693 million last year.

"HMRC sees the use of financial engineering to reduce taxable profits as one of the more artificial forms of corporate tax avoidance," said tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com. "They have been aggressively pursuing legal action against companies to put a stop to this - and taking home some big scalps."

"Reported tribunal cases include one scheme that prevented the avoidance of tax worth £88m and another for £120m so these are major victories for HMRC," she said.

The amount of tax that HMRC suspects of being underpaid through the complex misuse of leasing contracts has also fallen dramatically; from £1.86bn in 2011 to £471m last year, according to the figures. The figures relate to tax under investigation by HMRC's Large Business Service (LBS), which is responsible for the tax paid by the UK's 770 biggest firms.

Self said that once HMRC identified tax at risk, it was usually able to collect around 50% of the amount under consideration.

According to Self, the use of complex tax avoidance schemes involving financial instruments has been the focus of both HMRC litigation and legislative changes by the Treasury for a number of years. The government has particularly tried to prevent companies from using complex debt instruments known as STRIPS, in which the interest payments and principal payments of a loan are separated into their different parts, to artificially reduce their tax bills.

In addition, reputational issues and a crackdown on the promotion of the most aggressive tax planning schemes by the big accountancy firms were beginning to discourage their use, Self said.

"HMRC has hit the supply of these schemes by sending a clear message to the big accountancy firms that this kind of tax planning is beyond the pale," she said. "Demand has also been hit as most big listed companies are also less willing to use this kind of planning opportunity for fear of public exposure and that it might damage their ability to win public sector work."

"The last thing a big consumer-facing company needs at the moment is an accusation of big ticket tax avoidance. Any companies who still have skeletons in the cupboard need to find a way to bring these issues to a conclusion," she said.

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