Lehman Brothers creditors to avoid £1.2bn tax bill

Creditors of Lehman Brothers' UK-based European arm look set to avoid as much as £1.2bn in tax on the defunct bank's massive surplus.

HMRC had originally said the additional dividends could be paid free of duties, but changed its mind last year and decided any statutory interest should be treated as yearly interest and taxed accordingly, says the Financial Times.

But the High Court yesterday ruled payments to creditors could not be treated in the same way as regular interest – and criticised the tax watchdog for its inconsistent guidance.

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Lehman Brothers' underlying loan book was "in fairly good health" at the time of its collapse, says the Daily Telegraph. Having paid back the original sums owed, the European arm, which is in administration, is carrying a surplus of more than £5bn.

According to the FT, that figure could be as high as £7.8bn, with interest making up around £5bn of that sum. Administrators at PwC wanted to start making distributions from this next year.

If HMRC had succeeded in classifying the payments as regular annual interest then income tax of between 20 and 45 per cent would have been due for UK residents. The court said it was unable to calculate the tax at stake, but HMRC put the "risk to the Exchequer" at up to £1.2bn.

The figure does not relate to any tax already paid, so HMRC will not have to dole out any money. It has also been granted the right to appeal and a spokesperson said it is "carefully considering" the decision and may launch a challenge.

According to yesterday's ruling, the concept of "yearly interest" is "elusive" and had never been defined.

But the judge, Mr Justice Hildyard, said the concept should not be applied to insolvency proceedings, agreeing with PwC this might set a precedent for creditors to demand dividends are paid within the first year after administration.

He also said the application of tax on only some creditors would be "wholly unprincipled and without merit".

Of HMRC's change of heart, the judge added: "It is of real importance, both in terms of good governance and a fair market, that HMRC should make every effort to ensure that this sort of thing does not happen again."