Tax experts insist that ‘most big companies have no interest in bending the rules’, The Sunday Times reported yesterday. Barclays had 'failed to sense a prevailing mood against tax avoidance’, according to the paper.
As Tax Journal reported on Friday, 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’ avoidance schemes. HMRC has invited comments by 12 March on draft legislation to close a scheme to avoid the charge arising on a ‘deemed release’ of a loan relationship.
The government did not identify the bank but the Financial Times named Barclays, and on the following day the bank published a statement ‘in response’ to the Treasury’s announcement.
The Financial Times reported on 29 February in relation to the debt buyback scheme: ‘On 5 December Barclays moved to buy back £3.7bn of outstanding debt for up to £2.5bn. The gain of about £1.2bn should normally have been taxable, generating £300m under normal circumstances for Treasury coffers. But according to people briefed on the affair, Barclays sought to avoid that tax by replicating a traditional mechanism used by near-failing companies when buying back old debt.’
The Sunday Times quoted 'sources’ as saying that both schemes were signed off by a top law firm and an independent accountancy practice; that eight other organisations had used similar schemes; and that Barclays ‘bought back some bonds in response to regulatory pressure to raise its capital levels’.
The debt buyback scheme sought to ensure that the commercial profit arising to the bank from a buyback of its own issued debt was not subject to corporation tax, the Treasury said.
In particular, it sought to ‘exploit’ the loan relationships rules on releases of debt, David Gauke, the Exchequer Secretary to the Treasury, said in a ministerial statement on 27 February.
David Gauke
‘Normally a debtor company is taxed on the profit that arises when a liability is released for less than the amount borrowed, but special rules apply to connected companies. In such cases, a tax charge arises where a company connected to the debtor company buys the debt from the original creditor, or where debt is held between companies that become connected,’ Gauke explained.
‘These rules were amended in FA 2010 to block schemes under which banks bought back their issued debt that was trading at a discount in the market. When closing these previous attempts by companies to profit from buying back their own debt without being taxed, the government at the time made clear in two written ministerial statements that it expected such profits to be subject to corporation tax.’
The first of those statements was made in October 2009 by Stephen Timms, then the Financial Secretary to the Treasury. Some companies were ‘taking advantage of the rules set up to help company rescues in order to avoid being taxed on the profit they make when their debt is cancelled for less than the amount they borrowed,’ he said. The government proposed a change in the law ‘to ensure that only those debt buybacks that are undertaken as part of genuine corporate rescues will benefit from the buyback profits not being subject to tax’. A month later Timms announced a further change for groups of companies.
Gauke continued: ‘Despite these clear statements, the bank has now entered into a scheme using contrived arrangements that once again seeks to ensure that the profit on a buyback of such debt is not subject to corporation tax and therefore that a substantial amount of tax, of around £300m, is avoided.’
Finance Bill 2012 would amend the rules with effect from 27 February, he said, so that the legislation could not be circumvented in future. Retrospective amendments for debt acquisitions on or after 1 December 2011 would ensure that ‘the bank, and any other company that has engaged in a similar scheme in the same period, is taxed as it should be on this transaction’.
The potential tax loss and the ‘history of previous abuse in this area’ justified retrospective action to change the law, he said.
This was, Gauke added, a ‘wholly exceptional’ case as envisaged by a protocol – published at Budget 2011 – on unscheduled announcements of changes in tax law. The protocol was set out in the Treasury paper Tackling tax avoidance.
The Finance Bill will amend the rules on debts becoming held by a connected company, HMRC said in Loan relationships deemed releases and debt buybacks: Draft Legislation, Explanatory Note and Tax Information and Impact Note, and a targeted anti-avoidance rule (TAAR) will counter arrangements entered into in order to avoid or reduce a deemed release:
CTA 2009 s 358 normally exempts a company that is party as debtor to a loan relationship from a credit on the profit arising on the release of that debt by a connected creditor company, HMRC said.
‘There are exceptions to this [that is to say, the exemption does not apply] where the release is a “deemed release” or a “release of relevant rights”. A deemed release will arise either under s 361, where a company that is connected to the debtor company acquires the debt from a third party, or under s 362 where unconnected companies that are party as creditor and debtor to the loan relationship become connected. Under s 362 the amount of the deemed release is the amount of impairment recognised in the creditor company's accounts before it became connected with the debtor company.’
Finance Bill 2012 will amend s 362 to change the way that the deemed release is calculated, and will insert a new s 363A (the proposed TAAR) to deal with arrangements that have as their purpose the avoidance or reduction of a deemed release.
The credits and debits brought into account for tax purposes on loan relationships are ‘those that fairly represent the profits and losses recognised in accounts drawn up in accordance with generally accepted accounting practice’, HMRC said.
HMRC
No credits or debits are brought into account for tax purposes in respect of the impairment or release of debt between connected companies.
But a deemed release arises under 361 ‘where [creditor] C and [debtor] D are connected and C acquires a debt D owes to another creditor for less than its carrying value’. A carrying value in D’s accounts of 100 that is acquired by C for 80 ‘will result in a deemed release of 20 in D’.
HMRC said s 361 was amended in FA 2010 in response to arrangements under which companies were buying back their issued debt which was trading at a discount to the amount borrowed.
‘At the time there was an exception to the deemed release charge under s 361 to facilitate company rescues, which was used to ensure that the resulting profit would not be taxed.
‘If a debtor company (D) had bought back a liability of 100 that was trading at a discount of 20, a loan relationship credit of 20 would normally arise.
‘By having the debt acquired by a connected company (C) in circumstances where the exception to s 361 applied, and then releasing the debt intra-group, there would be no deemed release in D under s 361. Nor would there be a tax charge, under the normal operation of s 358, on the actual release of the debt. In effect the group was able to circumvent the tax charge on the profit that would normally be brought into account where a liability is released for less than the original amount of the debt.’
In October 2009 the [Labour] government announced that ‘this exception to the deemed release charge would be amended so that from the date of announcement only debt buybacks undertaken as part of a genuine corporate rescue would benefit from the buyback profit not being subject to tax’, HMRC said. Section 361 was further amended following the second ministerial statement.
Under ‘a scheme recently disclosed to HMRC under the disclosure of tax avoidance schemes (DOTAS) regime’, a debtor company (D) seeks to buy back its issued debt that is trading at a discount to its issue price.
‘The debt is acquired by an unconnected company (C). In accordance with arrangements in place when the debt is acquired, C then becomes connected with D,’ HMRC said.
‘Section 361 does not apply in this case because D’s debt was not acquired by a connected creditor. Section 362 does not apply because although the debt is held between companies that become connected, and C has acquired the debt at a discount, C has not impaired the debt. The debt is then released by C and under s 358 there is no loan relationship credit in D.
‘The scheme thus frustrates the purpose of the deemed release rule in s 358 and circumvents the [FA 2010] amendments to s 361, which aimed to block similar avoidance arrangements.’
A briefing prepared by the London office of Ashurst, the international law firm, describes ‘the kind of transaction suggested by the government’s announcement’.
The firm said details of the actual planning undertaken by the bank were not known. Barclays declined to provide details of its tax arrangements when contacted by Tax Journal on 2 March.
If the bank’s subsidiary had acquired the debt directly from the creditor, a deemed release would arise under s 361, Ashurst said. ‘[A company might try to circumvent that rule] by a two step process:
‘Step 1: An SPV [special purpose vehicle] which is an orphan vehicle [e.g. one whose shares are held by a charitable trust] acquires the debt for £1bn. There is no deemed release as the SPV would not control the debtor and therefore would not be connected for the purpose of the deemed release provisions.
‘Step 2: The charitable trust (or other entity holding the shares in the SPV) would exercise a put option to sell the SPV to the debtor for a small profit. There would be no deemed release on the debtor acquiring the SPV as the SPV acquired the debt for its £1bn market value and [would not be required to bring] into account any impairment in its books.’
The firm said the proposed Finance Bill 2012 anti-avoidance provisions were ‘broadly drafted’ and would ‘limit the scope for planning in the context of commercial restructurings’.
Barclays was not the only company that engaged in the types of transaction affected, said Lisa Pollack, writing on the FT Alphaville blog at the Financial Times. With the aid of Ashurst’s note, she set out to explain what had happened – emphasising that details of the precise structure used by Barclays were not known.
‘In short, the government offered a tax break for genuine corporate rescues in 2010,’ she said. ‘But now, because some party (or parties) decided to rescue themselves, i.e. make their debt buybacks more profitable via the tax line, it shut the route off to everyone. Not that they should have ever been using it in the first place, mind. Or: thanks for breaking up the band, Barclays.’
Barclays declined to comment on Pollack’s piece today. A spokesperson said the bank had no comment at this stage other than its statement of 28 February.
Tax experts insist that ‘most big companies have no interest in bending the rules’, The Sunday Times reported yesterday. Barclays had 'failed to sense a prevailing mood against tax avoidance’, according to the paper.
As Tax Journal reported on Friday, 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’ avoidance schemes. HMRC has invited comments by 12 March on draft legislation to close a scheme to avoid the charge arising on a ‘deemed release’ of a loan relationship.
The government did not identify the bank but the Financial Times named Barclays, and on the following day the bank published a statement ‘in response’ to the Treasury’s announcement.
The Financial Times reported on 29 February in relation to the debt buyback scheme: ‘On 5 December Barclays moved to buy back £3.7bn of outstanding debt for up to £2.5bn. The gain of about £1.2bn should normally have been taxable, generating £300m under normal circumstances for Treasury coffers. But according to people briefed on the affair, Barclays sought to avoid that tax by replicating a traditional mechanism used by near-failing companies when buying back old debt.’
The Sunday Times quoted 'sources’ as saying that both schemes were signed off by a top law firm and an independent accountancy practice; that eight other organisations had used similar schemes; and that Barclays ‘bought back some bonds in response to regulatory pressure to raise its capital levels’.
The debt buyback scheme sought to ensure that the commercial profit arising to the bank from a buyback of its own issued debt was not subject to corporation tax, the Treasury said.
In particular, it sought to ‘exploit’ the loan relationships rules on releases of debt, David Gauke, the Exchequer Secretary to the Treasury, said in a ministerial statement on 27 February.
David Gauke
‘Normally a debtor company is taxed on the profit that arises when a liability is released for less than the amount borrowed, but special rules apply to connected companies. In such cases, a tax charge arises where a company connected to the debtor company buys the debt from the original creditor, or where debt is held between companies that become connected,’ Gauke explained.
‘These rules were amended in FA 2010 to block schemes under which banks bought back their issued debt that was trading at a discount in the market. When closing these previous attempts by companies to profit from buying back their own debt without being taxed, the government at the time made clear in two written ministerial statements that it expected such profits to be subject to corporation tax.’
The first of those statements was made in October 2009 by Stephen Timms, then the Financial Secretary to the Treasury. Some companies were ‘taking advantage of the rules set up to help company rescues in order to avoid being taxed on the profit they make when their debt is cancelled for less than the amount they borrowed,’ he said. The government proposed a change in the law ‘to ensure that only those debt buybacks that are undertaken as part of genuine corporate rescues will benefit from the buyback profits not being subject to tax’. A month later Timms announced a further change for groups of companies.
Gauke continued: ‘Despite these clear statements, the bank has now entered into a scheme using contrived arrangements that once again seeks to ensure that the profit on a buyback of such debt is not subject to corporation tax and therefore that a substantial amount of tax, of around £300m, is avoided.’
Finance Bill 2012 would amend the rules with effect from 27 February, he said, so that the legislation could not be circumvented in future. Retrospective amendments for debt acquisitions on or after 1 December 2011 would ensure that ‘the bank, and any other company that has engaged in a similar scheme in the same period, is taxed as it should be on this transaction’.
The potential tax loss and the ‘history of previous abuse in this area’ justified retrospective action to change the law, he said.
This was, Gauke added, a ‘wholly exceptional’ case as envisaged by a protocol – published at Budget 2011 – on unscheduled announcements of changes in tax law. The protocol was set out in the Treasury paper Tackling tax avoidance.
The Finance Bill will amend the rules on debts becoming held by a connected company, HMRC said in Loan relationships deemed releases and debt buybacks: Draft Legislation, Explanatory Note and Tax Information and Impact Note, and a targeted anti-avoidance rule (TAAR) will counter arrangements entered into in order to avoid or reduce a deemed release:
CTA 2009 s 358 normally exempts a company that is party as debtor to a loan relationship from a credit on the profit arising on the release of that debt by a connected creditor company, HMRC said.
‘There are exceptions to this [that is to say, the exemption does not apply] where the release is a “deemed release” or a “release of relevant rights”. A deemed release will arise either under s 361, where a company that is connected to the debtor company acquires the debt from a third party, or under s 362 where unconnected companies that are party as creditor and debtor to the loan relationship become connected. Under s 362 the amount of the deemed release is the amount of impairment recognised in the creditor company's accounts before it became connected with the debtor company.’
Finance Bill 2012 will amend s 362 to change the way that the deemed release is calculated, and will insert a new s 363A (the proposed TAAR) to deal with arrangements that have as their purpose the avoidance or reduction of a deemed release.
The credits and debits brought into account for tax purposes on loan relationships are ‘those that fairly represent the profits and losses recognised in accounts drawn up in accordance with generally accepted accounting practice’, HMRC said.
HMRC
No credits or debits are brought into account for tax purposes in respect of the impairment or release of debt between connected companies.
But a deemed release arises under 361 ‘where [creditor] C and [debtor] D are connected and C acquires a debt D owes to another creditor for less than its carrying value’. A carrying value in D’s accounts of 100 that is acquired by C for 80 ‘will result in a deemed release of 20 in D’.
HMRC said s 361 was amended in FA 2010 in response to arrangements under which companies were buying back their issued debt which was trading at a discount to the amount borrowed.
‘At the time there was an exception to the deemed release charge under s 361 to facilitate company rescues, which was used to ensure that the resulting profit would not be taxed.
‘If a debtor company (D) had bought back a liability of 100 that was trading at a discount of 20, a loan relationship credit of 20 would normally arise.
‘By having the debt acquired by a connected company (C) in circumstances where the exception to s 361 applied, and then releasing the debt intra-group, there would be no deemed release in D under s 361. Nor would there be a tax charge, under the normal operation of s 358, on the actual release of the debt. In effect the group was able to circumvent the tax charge on the profit that would normally be brought into account where a liability is released for less than the original amount of the debt.’
In October 2009 the [Labour] government announced that ‘this exception to the deemed release charge would be amended so that from the date of announcement only debt buybacks undertaken as part of a genuine corporate rescue would benefit from the buyback profit not being subject to tax’, HMRC said. Section 361 was further amended following the second ministerial statement.
Under ‘a scheme recently disclosed to HMRC under the disclosure of tax avoidance schemes (DOTAS) regime’, a debtor company (D) seeks to buy back its issued debt that is trading at a discount to its issue price.
‘The debt is acquired by an unconnected company (C). In accordance with arrangements in place when the debt is acquired, C then becomes connected with D,’ HMRC said.
‘Section 361 does not apply in this case because D’s debt was not acquired by a connected creditor. Section 362 does not apply because although the debt is held between companies that become connected, and C has acquired the debt at a discount, C has not impaired the debt. The debt is then released by C and under s 358 there is no loan relationship credit in D.
‘The scheme thus frustrates the purpose of the deemed release rule in s 358 and circumvents the [FA 2010] amendments to s 361, which aimed to block similar avoidance arrangements.’
A briefing prepared by the London office of Ashurst, the international law firm, describes ‘the kind of transaction suggested by the government’s announcement’.
The firm said details of the actual planning undertaken by the bank were not known. Barclays declined to provide details of its tax arrangements when contacted by Tax Journal on 2 March.
If the bank’s subsidiary had acquired the debt directly from the creditor, a deemed release would arise under s 361, Ashurst said. ‘[A company might try to circumvent that rule] by a two step process:
‘Step 1: An SPV [special purpose vehicle] which is an orphan vehicle [e.g. one whose shares are held by a charitable trust] acquires the debt for £1bn. There is no deemed release as the SPV would not control the debtor and therefore would not be connected for the purpose of the deemed release provisions.
‘Step 2: The charitable trust (or other entity holding the shares in the SPV) would exercise a put option to sell the SPV to the debtor for a small profit. There would be no deemed release on the debtor acquiring the SPV as the SPV acquired the debt for its £1bn market value and [would not be required to bring] into account any impairment in its books.’
The firm said the proposed Finance Bill 2012 anti-avoidance provisions were ‘broadly drafted’ and would ‘limit the scope for planning in the context of commercial restructurings’.
Barclays was not the only company that engaged in the types of transaction affected, said Lisa Pollack, writing on the FT Alphaville blog at the Financial Times. With the aid of Ashurst’s note, she set out to explain what had happened – emphasising that details of the precise structure used by Barclays were not known.
‘In short, the government offered a tax break for genuine corporate rescues in 2010,’ she said. ‘But now, because some party (or parties) decided to rescue themselves, i.e. make their debt buybacks more profitable via the tax line, it shut the route off to everyone. Not that they should have ever been using it in the first place, mind. Or: thanks for breaking up the band, Barclays.’
Barclays declined to comment on Pollack’s piece today. A spokesperson said the bank had no comment at this stage other than its statement of 28 February.
