February 27, 2012 8:55 pm

Barclays faces block on tax schemes

Barclays has been blocked from implementing two “highly abusive” tax schemes that could have cost the Treasury £500m, despite the bank’s commitment to a new code of practice in which it pledged not to engage in tax avoidance.

Barclays has faced questions for years about its tax structuring and planning activities, and whether it actively attempts to take advantage of differences in countries’ tax legislation.

On Monday, the Treasury announced draft legislation to block one of the two schemes disclosed by an unnamed bank, which sought to avoid tax on profits arising from a buy-back of its own debt. The second scheme involved a transaction deliberately structured to secure tax credits from the Exchequer on non-taxable income, the Treasury said.

While the government declined to name the institution involved, several people familiar with the case confirmed to the Financial Times that it was Barclays. The bank declined to comment.

Unlike tax evasion, tax avoidance is not illegal. However, under the Banking Code of Practice on Taxation, UK banks accept a commitment not to engage in tax avoidance. It is also highly unusual for the Treasury to seek “retrospective” legislation aimed at closing a particular tax avoidance scheme.

“The bank that disclosed these schemes to HMRC has adopted the [Code] which contains a commitment not to engage in tax avoidance,” the Treasury said. “The government is clear that these are not transactions that a bank that has adopted the Code should be undertaking.”

“The government wants to ensure that the tax system is fair for all and we will not allow those who seek to benefit from this aggressive avoidance to get an unfair advantage,” said David Gauke, Exchequer Secretary to the Treasury. “We do not take today’s action lightly, but the potential tax loss from this scheme and the history of previous abuse in this area mean that this is a circumstance where the decision to change the law ... is justified.”

According to people familiar with the case, Barclays replicated a tax avoidance scheme used by other companies when buying back their own debt at a discount. However, previous deals had typically involved deeply troubled companies which - unlike Barclays - could have been pushed into collapse by a high tax charge on such gains.

The bank is now working to establish what went wrong with its tax arrangement. People familiar with the case said Barclays did not agree that the amount in contention totalled £500m.

The Financial Times reported in September that Barclays was a major marketer of structured finance schemes that allowed US banks to generate billions in foreign tax credits, several of which are now being contested in US courts.

Under Bob Diamond, chief executive, London-based Barclays has recently stressed the benefits it brings to the UK. “We reinforce our business integrity every day by striving to improve the service we provide; making responsible decision in how we manage the business; and actively managing the social and environmental impacts of what we do,” the bank said in its annual results presentation earlier this month.

Additional reporting by Jim Pickard

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