Barclays faces a double blow to its reputation and finances after Britain sought to retrieve more than 500 million pounds ($792 million) from banks by closing loopholes on "highly abusive" tax avoidance schemes. Britain said it would close two "aggressive tax avoidance schemes" used by Barclays.
The criticism is hugely embarrassing for the bank, which has signed up to a voluntary code of practice not to engage in tax avoidance and whose boss, Bob Diamond, has said banks must win back trust from the public and be better "citizens." "This will add a couple more years to the brand rejuvenation," said Ralph Silva, director at financial services research firm SRN. "The maths on this isn't a big issue, but reputationally it is not only that they aren't giving to society, but they will be seen as actually taking," he said.
Tax avoidance is not illegal, and Barclays said it had done nothing wrong and voluntarily alerted HM Revenue & Customs (HMRC) that it had bought back some of its own bonds "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," the bank said in a statement. Barclays said it complies with the letter and spirit of tax laws and the code of conduct.
The Treasury's estimate that it will retrieve the payment of 500 million pounds refers to tax collected from all banks, a person familiar with the matter said. Reuters on Monday estimated Barclays could have to pay about 120 million pounds after making 450 million pounds on a bond buyback deal in December. The Treasury will retrospectively apply new laws from the start of December. Barclays said it will comply with the modified law, and the impact would not have a material impact on its profits.
Banks have made massive profits from buying back or exchanging their bonds, taking advantage of a fall in their market value. The process is known as liability management. Royal Bank of Scotland and Lloyds, both partly owned by the UK taxpayer, have made 3.2 billion and 4.3 billion pounds respectively in liability management gains in the last three years.
Britain changed the tax treatment of how bond buybacks were dealt with two years ago and the Treasury said the schemes used by Barclays were designed to work around that legislation. Tax systems are complex and experts say companies have a duty to shareholders to minimise tax, leaving a grey area on what is acceptable. The row with Barclays shows Britain is cracking down, and also that the environment has become more unpredictable.
HSBC, Britain's biggest bank, on Monday said it was in a dispute with UK authorities over tax paid by Asian and some European subsidiaries to an HSBC holding company in the Netherlands from 2002 to 2009. HSBC said it could have to pay as much as $4.9 billion, plus interest, if it loses. In the unrelated Barclays dispute, the Treasury aims to close loopholes on two schemes - one on bond buybacks and the other on authorised investment funds - to protect billions of pounds in future tax being lost.