C&W urged to explain potential £1.5bn tax liability

Cable & Wireless was yesterday under pressure to shed more light on its potential £1.5bn tax liability amid anger that it has been kept hidden from investors for more than three years.

While the company, which must now ring-fence £1.5bn of its cash pile or provide a bank guarantee for the same sum, believes the liability will never crystallise, it will not explain why.

But given the Inland Revenue investigation into the matter is not expected to be resolved soon, analysts feared the potential liability could seriously hamper C&W's restructuring plans.

"In the interim, we believe reputational damage and financial uncertainty will increase execution risk for the announced Global restructuring plan," said analysts at Goldman Sachs. They thought the Inland Revenue's investigation was still at an early stage, despite being initiated in 2000.

The potential liability relates to the 1999 sale of C&W's 50 per cent stake in the mobile phone operator One2One, now T-Mobile, to Deutsche Telekom for £3.45bn. Under the terms of that deal, C&W agreed to protect Deutsche Telekom from any future tax liabilities relating to the disposal and agreed that, should its debt rating fall below "Baa" status, it would ring-fence the cash or get a guarantee.

The pledge, which is routine in such transactions, would have been made to ensure the German group did not get stuck with the tax bill if, for example, C&W went under before settling it.

A C&W spokesman said yesterday the £1.5bn figure related "principally" to the issue of whether capital gains tax was payable from the disposal. "We can't say there might not be some other small thing [relating to the liability]," he said but denied there was any investigation into the accounts.

C&W says its legal and tax advisers insist there is no liability and that the sale of the One2One stake did not give rise to a taxable gain.

One tax expert suggested there might not be a liability if any gain on the disposal was offset against previous losses or if the tax domicile of the company had been changed. Another, however, questioned whether there were other elements to the liability apart from CGT, saying: "I presume this can't just be CGT as such."

KPMG, the group's auditors, refused to comment on the potential liability which C&W has never disclosed in its accounts. It says that since it believed the liability to be so remote, its interpretation of the accounting standard FRS12 meant it did not have to be flagged.

The issue was only brought to the board's attention in the middle of last month after the credit ratings agency Moody's downgraded C&W's long-term debt rating and warned it might downgrade further. The company had to make the potential liability public last week because a further debt downgrade by Moody's to junk status triggered the clause with Telekom.