In a remarkable departure from long-standing practice, HMRC has questioned whether ‘perpetual’ instruments of the kind typically used as ‘innovative Tier 1 capital’ constitute debt for tax purposes. This has caused considerable uncertainty for issuers and their advisers. HMRC will have an opportunity to clarify its position when it publishes its promised update on the tax treatment of ‘Basel III’ regulatory capital. In the meantime, an issuer of new innovative Tier 1 capital might consider providing for settlement of the perpetual through an issue of shares, thereby putting its tax status beyond any doubt.