HM Revenue & Customs has warned charities they could be taxed on income from a form of bond trading known as 'bond washing'.
It involves selling a bond just before the interest or dividend is due, then buying it back within six months, after the dividend has been paid and the price has fallen. This results in a tax-free profit for the purchaser and a capital gain for the original bond vendor.
"For HMRC to threaten to tax-exempt income on the grounds that the other party in the transaction might be engaged in tax avoidance is taxing an innocent party," said Roy Maugham, tax partner at accounting firm UHY Hacker Young.
A spokeswoman for HMRC said income covered by the bond washing legislation would not normally be tax free.