A UK tax tribunal has found that a subsidiary of Bank of Ireland made a "flawed attempt" to exploit a tax loophole in order to avoid paying £30 million (€35 million) in tax.

Bristol and West, Bank of Ireland’s UK mortgage lending subsidiary, lost an attempt at a tax tribunal to avoid paying about £30 million tax on a £91 million gain it made in 2003. The tribunal made its decision in March but it was only made public by the HM Revenue & Customs (HMRC) yesterday.

In an effort to avoid the tax, Bristol and West transferred an “in the money” fixed/floating interest-rate swap to another Bank of Ireland subsidiary, Bank of Ireland Business Finance Limited (BIBF), in what the HMRC deemed to be a “flawed attempt to exploit what it thought was a loophole in the tax rules”.

Bristol and West entered into the swap transaction for commercial hedging reasons, but decided to transfer the swap to another Bank of Ireland subsidiary to exploit a perceived weakness in rules on the taxation of swaps in Finance Act 2002.

According to the HMRC, the bank’s theory was that the £30 million tax would “disappear” on the cancellation of the original contract and its replacement with a new one, because one of the companies involved in the swap was within the new regime while the other, BIBF, was not, due to the earlier commencement of its accounting period.

However, the tribunal upheld HMRC’s view that there is in fact no loophole to exploit.

More detail
According to a spokesman for HMRC, the tax authorities first became aware of the tax avoidance when Bristol and West filed its end of tax returns for the period ending on March 31st, 2004. It then started to look into the incident in more detail, but it has taken until now for a decision to be made.

It was not disclosed whether or not Bristol and West was penalised for late payment of the aforementioned tax.

Bank of Ireland yesterday declined to comment on the findings of the tribunal.