HMRC’s homage to Peter Falk with new 45% "special" CT rate

So the ink was almost dry on the Finance Bill. Then in a last minute move reminiscent of the late great Peter Falk playing Colombo, HMRC stopped and said “Oh, just one more thing…”

And that thing? An unexpected new tax (or rate of tax to be precise), intended by HMRC to avoid “an unfair tax advantage” being enjoyed by some.

HMRC is facing a number of legal challenges that may result in significant repayments of tax to businesses, with compound restitution interest being due. One of the biggest involves Littlewoods and a repayment of over £1 billion. With compound interest dating back up to 30 years also at stake, HMRC is facing a big dent in net receipts.

As things stand, this interest is taxable in the hands of the taxpayer. So one might expect that HMRC will in effect recoup (or withhold) 20% of the interest.

But then along came an unexpected last minute twist in the Finance Bill. From 21 October 2015 this interest will not be subject to corporation tax at 20% but 45%! So we now have a UK CT rate (at least in these particular circumstances) of 45%. UK CT rates anywhere near that only ever gets a mentioned in the dewy-eyed reminiscences of our more experiences tax colleagues.

So what rationale has HMRC come up with for this rate? It is, to be honest, a pretty unconvincing one.  And yes, it does relate back to those heady Colombo filled days of the 1970s and early 1980s with a 52% rate of CT. HMRC argues that because restitution interest can relate to historic periods when the CT rate was much higher, it is only “fair” that the interest should be taxed at a “special rate”.

It seems highly likely that this will be challenged by taxpayers, as it skews the economic impact of the restitution interest, and raises the question as to whether the net 55% received in the hands of the taxpayer constitutes restitution required under EU law.

It's not lost on me that this significantly reduces the impact of this interest on HMRC. Perhaps that’s just an unintended upside. Perhaps.

One can’t help thinking that, if this is the end of the Colombo episode, we haven’t really had an explanation of “who dunnit”. HMRC’s guidance just doesn’t seem to quite hang together.  I’m left with a few questions, although I’m not holding my breath waiting for answers:

• How did HMRC come up with a rate of 45%?
• Will HMRC also be allowing enhanced deductions for interest payable on underpayment of CT?
• Is this really about “fairness”, or trying to mitigate the hole in HMRC’s figures created by these significant claims? 

I’m not convinced that we are going to get a nice neat Colombo style wrap up here, with all the loose ends brought together. Perhaps the difference is that we all know Colombo was always planning that “Oh, and one more thing” moment, whereas I wonder whether HMRC came up with this one just as pen was going to paper.