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Banks ‘abused’ buy-back legislation twice in two years, says HMRC

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Barclays insisted that its tax arrangements were within ‘the letter and spirit’ of HMRC’s Code of Practice on Taxation for Banks after the government announced retrospective legislation to close two ‘highly abusive’ tax avoidance schemes.

‘The bank that disclosed these schemes to HMRC has adopted the [code] which contains a commitment not to engage in tax avoidance, HM Treasury said. ‘The government is clear that these are not transactions that a bank that has adopted the code should be undertaking.’

'The corporation tax rules on deemed releases are intended to ensure that this profit is only exempt from tax in very particular circumstances where a business is in distress.'

HMRC spokesman

Patrick Jenkins, Banking Editor at the Financial Times, noted today that Barclays 'has a pedigree of clever tax structuring, both for clients and for its own account'.

'But as [Bob Diamond, Barclays Chief Executive] began stressing the “citizenship” message, the image of tax expertise has faded. Over the same period, Barclays joined other UK banks in signing up to a deal with the government not to seek to avoid tax. But on Monday, the citizenship message suddenly looked empty.’

The balance of criticism has been ‘damning of Barclays’, he added.

The Treasury said both schemes were designed to work around legislation designed to block similar attempts at avoidance: ‘By acting immediately, the government will ensure the payment of over half a billion pounds in tax, protect further billions of tax from being lost and maintain fairness in the tax system.’

The first scheme sought to ensure that the commercial profit arising to the bank from a buy-back of its own debt was not subject to corporation tax, the Treasury added.

‘In a bold step not previously taken by this Government, legislation is being introduced today that will not only prevent the scheme’s use in the future, but will also act retrospectively to block its recent use by the bank that has disclosed the scheme and by any other company that has engaged in a similar scheme in the same period.’

‘Contrived’ arrangements

‘It is a normal commercial action for a company to buy back its issued debt that is trading at a discount in the market in order to reduce its liabilities,’ an HMRC spokesman told Tax Journal.

‘However, the normal commercial profit that arises in such a case should be subject to tax and the corporation tax rules on deemed releases are intended to ensure that this profit is only exempt from tax in very particular circumstances where a business is in distress. This scheme involves highly contrived arrangements to circumvent the intention of the legislation.

'What could possibly go wrong? The answer came in the form of continued tax avoidance in a form which left government spokespeople using the emotional language of betrayal ...'

George Bull, Senior Tax Partner, Baker Tilly

‘This is the second time in just over two years that the legislation has been abused by banks buying back their issued debt that is trading at a discount to the amount borrowed. Written ministerial statements were made in October and November 2009 announcing that only debt buybacks undertaken as part of a genuine corporate rescue would benefit from the buyback profit not being subject to tax. Legislation was changed accordingly in FA 2010.

‘However, a bank has now used a closely related feature of the legislation to avoid a taxable profit on the buyback. It is clear what the legislation is intended to achieve and, in particular as the bank in question has adopted the Code of Practice under which it has committed not to undertake such avoidance, it is appropriate in such exceptional circumstances to close the scheme retrospectively.’

The second scheme involved authorised investment funds and aimed to ‘convert non-taxable income into an amount carrying a repayable tax credit in an attempt to secure “repayment” from the Exchequer of tax that has not been paid’, the Treasury said.

Code of practice

A leading article in The Times on Wednesday observed that under the code, ‘Barclays and the other big British banks undertake not to engage in tax avoidance’. The government’s response ‘ought not to surprise Barclays, as it is clearly in breach of the code,’ the paper said.

In a client briefing yesterday, Baker Tilly noted that retrospective legislation was being introduced following ‘breaches’ of the code. George Bull, Senior Tax Partner at the firm, noted that the code was drawn up ‘at a time when banks were under pressure from the government to step back from complex tax avoidance schemes’. A voluntary code seemed a better alternative than targeted anti-avoidance rules that would ’almost certainly generate new loopholes or exploitation’, he said.

‘With a clear purpose, and a reliance on trust between the parties, what could possibly go wrong? The answer came in the form of continued tax avoidance in a form which left government spokespeople using the emotional language of betrayal, followed closely by the announcement of retrospective tax legislation.’

But Nicholas Gardner, a Senior Associate at the law firm Ashurst, told Tax Journal that the code was ‘couched in such general terms – for example, “the proper amounts of tax” – that it fails to give any meaningful guidance as to the distinction between legitimate tax planning and what HMRC would consider tax avoidance'.

Ashurst published a briefing this week to illustrate the kind of transactions suggested by the government’s announcement in relation to debt buy backs. The firm emphasised that it did not have details of ‘the actual planning undertaken’ by the bank.

The code is available on the HMRC website and is reproduced below.


HM Treasury’s announcement on 27 February did not name Barclays but the Financial Times reported that ‘several people familiar with the case’ confirmed that it related to Barclays.

On 28 February Barclays said in a statement the ‘situation arose’ when Barclays voluntarily disclosed to HMRC ‘in a spirit of full transparency’ that it had repurchased some of its debt in a tax efficient manner.

‘The disclosure was based on guidance from professional advisers that the treatment was both legal and compliant with the tax code, and given others had used a similar treatment,’ the bank said. ‘Barclays also disclosed its participation in an authorised investment fund which is also legal and compliant with the tax code.’

'[The code] fails to give any meaningful guidance as to the distinction between legitimate tax planning and what HMRC would consider tax avoidance.'

Nicholas Gardner, Senior Associate, Ashurst

The company said: ‘Barclays takes its responsibilities as a corporate citizen very seriously. Barclays ensures that all transactions that it undertakes are fully in accordance with relevant tax law wherever it does business. In the UK we comply with the letter and spirit of all our obligations under the HMRC Code of Practice and have open and transparent dealings with HMRC.’

Barclays declined to comment further on whether the transactions were in breach of the code, and declined to provide details of its tax arrangements, when contacted by Tax Journal.

Retrospective legislation

Retrospection ‘has been a dirty word for centuries’, PKF Partner Philip Fisher observed. ‘That is because everyone believes in the principle of arranging taxation affairs with full knowledge of their consequences.’

Writing in today’s issue of Tax Journal, he added: ‘It is therefore very worrying to find not one but two precedents [the other relating to the decision in PA Holdings] where it could be argued that the wording of the law has been overridden by political or social necessity.

‘Whether this is a good thing because it protects the Exchequer from those taking steps that are wholly unreasonable (and might be interpreted by many as immoral) might be open to doubt.

‘On the other hand, where taxpayers (or more accurately tax not-payers) are taking cash out of the hands of the millions who do pay their tax legitimately, not to mention those who would like to get educated, fed or restored to full health, it might be suggested that drastic steps are the only solution.’

George Bull at Baker Tilly said he did not believe the Treasury’s move marked ‘the top of a slippery slope where retrospective tax legislation becomes part of the norm in the UK’.

It served as a warning, he said, ‘as to how the UK tax landscape might look like once the widely welcomed general anti-abuse rule is in force’.

‘As we have previously observed, if the independent checks and balances proposed under the GAAR do not allow HMRC to tackle what it perceives to be abusive tax behaviours, then HMRC may respond by enacting specific anti-avoidance legislation to stamp out the perceived abuse. Logically, there is no reason why that sort of legislation should not also be retrospective.’

Code of Practice on Taxation for Banks


1. The Government expects that banking groups, their subsidiaries, and their branches operating in the UK, will comply with the spirit, as well as the letter, of tax law, discerning and following the intentions of Parliament.

1.1 This means that banks should:

  • adopt adequate governance to control the types of transactions they enter into;
  • not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament;
  • comply fully with all their tax obligations; and
  • maintain a transparent relationship with HM Revenue & Customs (HMRC).


2. The bank should have a documented strategy and governance process for taxation matters encompassed within a formal policy. Accountability for this policy should rest with the UK board of directors or, for foreign banks, a senior accountable person in the UK.

2.1 This policy should include a commitment to comply with tax obligations and to maintain an open, professional, and transparent relationship with HMRC.

2.2 Appropriate processes should be maintained, by use of product approval committees or other means, to ensure the tax policy is taken into account in business decision-making. The bank’s tax department should play a critical role and its opinion should not be ignored by business units. There may be a documented appeals process to senior management for occasions when the tax department and business unit disagree.


3. The bank should not engage in tax planning other than that which supports genuine commercial activity.

3.1 Transactions should not be structured in a way that will have tax results for the bank that are inconsistent with the underlying economic consequences unless there exists specific legislation designed to give that result. In that case, the bank should reasonably believe that the transaction is structured in a way that gives a tax result for the bank which is not contrary to the intentions of Parliament.

3.2 There should be no promotion of arrangements to other parties unless the bank reasonably believes that the tax result of those arrangements for the other parties is not contrary to the intentions of Parliament.

3.3 Remuneration packages for bank employees, including senior executives, should be structured so that the bank reasonably believes that the proper amounts of tax and national insurance contributions are paid on the rewards of employment.


4. Relationships with HMRC should be transparent and constructive, based on mutual trust wherever possible.

4.1 The features of this relationship should include:

  • disclosing fully the significant uncertainties in relation to tax matters;
  • focusing on significant issues;
  • seeking to resolve issues before returns are filed whenever practicable;
  • engaging in a co-operative, supportive and professional manner in all interactions;
  • working collaboratively to achieve early resolution and hence certainty.

4.2 Where the bank is in doubt whether the tax result of a proposed transaction is contrary to the intentions of Parliament, to help the bank form its reasonable belief under section 3, it may discuss its plans in advance with HMRC.

Source: HMRC, A Code of practice on taxation for banks (December 2009)