Barclays Bank has emerged as the target for two retrospective measures to close Corporation Tax avoidance schemes worth an estimated £500m.
On the afternoon of Monday 27 February, the Treasury released details of amendments that will be included in the Finance Bill 2012 to prohibit arrangements that exploit “deemed releases” rules on loan relationships to avoid Corporation Tax. The retrospective provisions will apply to arrangements made between 1 December 2011 and 27 February 2012 - which the details of which would have already been disclosed to HMRC under its Disclosure of Tax Arrangement Schemes (DOTAS) rules. The amendments cover:
- Debt buybacks – The tax rules on loan relationships rules as currently defined do not apply where a debt exists between connected companies. Following the amendment, they will now impose a “deemed release” on the debtor if that debt is purchased at a discount by a connected creditor, or if “contrived arrangements” are used to ensure the profit on a buyback of discounted debt would not be subject to Corporation Tax. The statutory instrument and explanatory notes are available from HMRC’s website (81kb PDF).
- Authorised Investment Fund regulations – amended to prevent situations “under which a small minority of corporate investors have sought to create repayable tax credits with distributions received from an authorised investment fund (AIF) where no underlying tax has been paid”. More details here.
The ministerial announcement from exchequer secretary to the Treasury David Gauke mentioned no names, but pointedly remarked that the rules on discounted debt buybacks by banks had been targeted in the Finance Act 2010, but that an unnamed bank had entered into such a scheme.
“The bank has adopted the Code of Practice which contains a commitment not to engage in tax avoidance,” Gauke added. “The Government is clear that this not a transaction that a bank that has adopted the code should be undertaking.”
Both the debt buy backs and investement products designed to create tax credits where the tax in question has not been paid were “wholly unacceptable, against the intentions of Parliament and the spirit of the law”, the minister added.
It quickly emerged in news reports in the Financial Times and the BBC that Barclays was the bank concerned, which reported that the amounts concerned were in the region of £500m. The bank would not comment. In its preliminary results earlier this month, Barclays came under fire from the investor lobby group PIRC after reporting adjusted profits of £5.6bn - a stark contrast to the billion pounds of losses reported by partially nationalised banks RBS and Lloyds TSB.
Retrospectively closing arrangements that could have been vetoed under DOTAS is an odd way for the Treasury to behave. Cynics might even argue that the government saw an opportunity to demonstrate how it was getting tough with corporate tax avoidance while simultaneously padding its current account with a few hundred million extra.
The Treasury webpage containing these anti-avoidance measures is worth a closer look, as it is packs a veritable mini-Budget of draft legislation and a number of other noteworthy new pre-Budget consultation documents.
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