Morgan Crucible case prompted tax law change

MORGAN Crucible, the manufacturing conglomerate, is thought to be the British company whose tax-avoidance plans led to the rapid closing of a loophole in this year's Finance Act.

Along with other companies, Morgan Crucible is understood to have been trying to minimise its tax bills by designing the financial structure of British subsidiaries to take advantage of the UK's double taxation treaties with overseas countries.

The schemes - turning on the interpretation of the treaties - ran into strong opposition from the Inland Revenue, which was worried about a loss to the Treasury of as much as pounds 150m.

Some 20 other companies, whose schemes were designed by a special unit of tax advisers based at the London branch of the American Continental Bank, are thought to have abandoned their tax-cutting plans rather than fight a long battle with the taxman.

Morgan Crucible decided to fight the Revenue, and the case ended at a secret hearing of the Special Commissioners in May. To the Revenue's shock, the commissioners decided the tax- avoidance schemes were legal.

But Morgan Crucible's victory proved short-lived. Stephen Dorrell, Financial Secretary to the Treasury, rushed through emergency legislation that was included in the new Finance Act in July.

The schemes involved financing UK subsidiaries with debt or equity notes - a hybrid instrument - rather than providing them with ordinary equity capital. The interest payments on the debt could be deducted from UK profits, so reducing the tax bill, before flowing overseas.

The Revenue argued that the payments were dividends and subject to a 25 per cent withholding tax. But the commissioners maintained the payments were interest and tax- deductible - a position now reversed in the Finance Act.

It is not clear how much tax Morgan Crucible had saved or intended to save through its avoidance schemes.

Traditionally, the company has not been highly regarded in the City, where its shares have usually sold on a low rating. This partly reflects its thirst for new equity from shareholders.

But Morgan Crucible has also been attacked for its aggressive acquisition-accounting policies, under which it makes substantial provisions after takeovers. These may later be used to protect growth in reported profits and earnings per share. Last year, for example, the company made pre-tax profits of pounds 61m, but pounds 12.5m of costs were covered by acquisition provisions.

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