HMRC to tax charities for involvement in bond washing

HM Revenue & Customs has issued a statement confirming that charities will be charged tax and interest dating back six years if they are deemed to have been involved in bond washing.

The trading involves selling a bond just before the interest is due, and subsequently buying it back within six months once the value has fallen. The result is a profit for the vendor and a capital gain for the bond issuer. When the legislation banning bond washing was first introduced in the 1950s, it was an attempt to stop buyers and sellers colluding in a form of tax evasion.

However, in the modern electronic stock market environment the two parties do not have any contact, and HMRC has admitted that the charities that have engaged in bond washing have done so “inadvertently”.

Despite this acknowledgement, charities will still be charged tax on any bond washing undertaken over the past six years, as well as interest on any tax owed.

In a statement, HMRC plays down the risk to charities. “As a result of constructive discussions with these charities, it has become clear that the risk of liability in this area is less than had been thought,” it reads.

Although the statement promises that HMRC “will not be contacting any more charities with questions relating to bond washing”, it is still unclear how organisations should proceed if they have not yet been contacted by the Revenue but suspect that they have a bond washing liability.

This issue may be clarified if further work is done to amend the legislation. “This work on bond-washing has suggested that there are some issues around the application of the bond-washing legislation to charities that do need to be looked at in more detail, particularly where it is clear that tax avoidance was not the purpose of the transactions,” the statement reads. “HMRC will be working with the charity sector over the summer on these issues.”

Helen Donoghue, director of the Charities Tax Group, said: “We are glad that HMRC has recognised that very few charities will have incurred a liability and that any liability will have arisen inadvertently. The legislation is clearly inappropriate to modern-day transactions and can result in charities incurring a liability inadvertently on income that should be exempt from tax. We look forward to working with HMRC on how the legislation can be improved and updated.”

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