Market leading insight for tax experts
View online issue

Barclays complains of ‘unnecessary damage’ to reputation following tax disclosure

printer Mail

Barclays has complained to MPs that it was ‘singled out’ when the government announced retrospective legislation in February to impose a tax liability on what the bank described as a ‘tax-efficient’ repurchase of some of its debt.

HM Treasury announced on 27 February the closure of two ‘highly abusive’ tax avoidance schemes. ‘The bank that disclosed these schemes to HMRC has adopted [HMRC’s Code of Practice on Taxation for Banks] which contains a commitment not to engage in tax avoidance, the Treasury said in a press release. ‘The government is clear that these are not transactions that a bank that has adopted the code should be undertaking.’

'The Treasury is expected to reject the allegation that it undermined taxpayer confidentiality'

Financial Times

‘Clear precedent’

Barclays Chief Executive Bob Diamond has written to Andrew Tyrie, Chairman of the Treasury Committee, to say that the government’s response to the company’s disclosure of the debt buyback arrangement was ‘completely unwarranted’.

Diamond told Tyrie that Barclays was a voluntary signatory to HMRC’s code, which ‘obligates us to comply with the letter and spirit of the law’.

He added: ‘Barclays voluntarily and proactively disclosed to HMRC that we had repurchased some of our debt in a tax efficient manner. Our pursuit of the particular tax treatment ... was based on strong legal guidance, as well as information on market practice in this area from professional advisers, which together helped inform our conclusion that the transaction was compliant with the tax code.

‘The important judgement from our advisers was that other companies had used a similar treatment; that it was reasonable to assume that HMRC was aware  of those similar treatments; and that, because HMRC had taken no action to prevent those treatments, there was a clear precedent to satisfy the test of the spirit of the law.’

‘Effective naming’

Barclays was the first and only taxpayer to make a disclosure, Diamond said. ‘We were, therefore, surprised to be singled out ... not only through a retrospective change of law, but the effective naming of Barclays by the Exchequer Secretary in his statement to Parliament, accusing the bank of entering into a “highly abusive” scheme.’

It was important to the UK’s reputation as a business centre, Diamond said, that that principle of taxpayer confidentiality was ‘not seen to be compromised or watered down’.

As Tax Journal reported on 2 March, the Treasury’s announcement of 27 February did not name Barclays but the Financial Times reported that ‘several people familiar with the case’ confirmed that the announcement related to Barclays.

The bank had posted a detailed statement on its website on 28 February, titled ‘Barclays statement in response to HM Treasury tax law change’.

The Financial Times reported today: ‘The Treasury is expected to reject the allegation that it undermined taxpayer confidentiality as it did not name the bank until Barclays put out a statement on the matter. The Financial Times, which was the first newspaper to name Barclays, based its report on sources within the bank. Only a relatively small group of banks were contenders given the information put out by the Treasury.’

In the ministerial statement of 27 February the Exchequer Secretary to the Treasury, David Gauke, told MPs that the bank, which he did not name, had used ‘contrived arrangements’ to avoid around £300m of corporation tax despite two earlier ‘clear statements’ that [the government] expected profits to be subject to corporation tax.

Tyrie has asked the Chancellor, George Osborne, for his comments on Diamond’s letter. The Guardian quoted Tyrie as saying: ‘It is important that we find out what happened here.’

Anti-avoidance measures

The Finance Bill explanatory notes prepared by HMRC and HM Treasury stated: ‘Clause 23 modifies the corporation tax rules on loan relationships that apply when the parties to a loan relationship become connected.

‘The clause changes the circumstances in which companies that become connected with pre-existing debt bring in a deemed release in respect of that debt, and the calculation of the amount of that deemed release.

‘It inserts a new anti-avoidance rule to ensure that the existing rules relating to deemed releases cannot be circumvented. It also inserts a retrospective provision in relation to particular arrangements circumventing the existing rules where a company becomes creditor to a loan relationship on or after 1 December 2011 and before 27 February 2012.’

Policy reason ‘remains veiled in obscurity’

David Southern, a Barrister at Temple Tax Chambers, has questioned the policy justification for the government’s decision to extend the deemed release rules in CTA 2009. Writing in Tax Journal in April, Southern said the provisions at clause 23 of the current Finance Bill ‘invent a transaction which does not take place (a deemed release) and tax it as if it did’.

He added: ‘This is not an anti-avoidance rule. It does not collect tax which might otherwise be avoided. It imposes tax which would not otherwise be due. It is the logical antithesis of an anti-avoidance rule. It is a tax creation rule ... The underlying policy reason for the deemed release rules (other than simply to raise tax) remains veiled in obscurity.’