Media reports yesterday identified Barclays as the bank that has been hit by the crackdown on a corporate tax loophole, said to be worth £500 million to the UK-listed banking group. The practice related to how banks repurchased debt at a lower price than the level at which they sold it and avoided paying corporation tax as a result. Government statements did not name Barclays, nor confirm the £500 million figure.

The issue is an embarrassment to a bank that, in contrast to UK rivals Royal Bank of Scotland and Lloyds Banking Group, has neither received nor sought taxpayer bailouts. Results showed that Barclays’ profit rose in 2011, and its Barclays Wealth arm also enjoyed improving performance. Barclays said its 2011 results will be materially unaffected. 

"Barclays respects the decision of HMRC and the government to adjust the tax laws and will, of course, comply with the modified law once it is in place. The retrospective change in legislation enacted would not have a material impact on Barclays profits and would not cause Barclays to alter its preliminary results which were published on 10 February,” the bank said in its statement yesterday. 

“This 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. This was based on guidance from professional advisors that the treatment was both legal and compliant with the tax code, and given others had used a similar treatment. Barclays also disclosed its participation in an authorised investment fund which is also legal and compliant with the tax code,” it said. 

Anti-avoidance

The affair demonstrates how the cash-strapped UK government is determined to go after schemes that lawmakers consider to be established purely in order to mitigate tax. The issue is controversial, not just because changes can be applied retroactively – which can weaken the crucial function of predictability in law - but because avoidance is not, in general terms, an offence, whereas tax evasion is.

A statement by David Gauke, a UK Treasury minister, did not identify Barclays by name, and neither did HM Revenue & Customs spokespeople when contacted by this publication today. However, Barclays has now disclosed the matter.

The measures apply to conduct between 1 December 2011 and 27 February this year. Under current law – with some caveats – it 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.

The move will protect the government from loss of tax through such avoidance arrangements, HMRC said.