WSJ: U.K. Hits Bank With £500 Million Tax Claim

The Wall Street Journal BUSINESS February 27, 2012, 2:46 P.M. ET
U.K. Hits Bank With £500 Million Tax Claim
LONDON--A bank operating in the U.K. will have to make a tax payment of more than £500 million (about $792 million) after the government took action Monday to close two "aggressive" tax-avoidance schemes the bank was using.
The Treasury said the closure of the two schemes--which it described as being "highly abusive"--would also prevent billions of pounds being lost in the future.
The tax avoidance came to light when the bank in question recently disclosed to U.K. tax department HM Revenue & Customs that it had used the schemes. The Treasury declined to name the bank for confidentiality reasons.
Under the first scheme, the bank used a loophole that meant the commercial profit from a buyback of its own debt wasn't subject to corporation tax.
In an usual step, the government said it would introduce legislation that wouldn't only prevent the scheme's use in the future, but will also act retrospectively to block its recent use by the bank. The legislation will also apply to any other bank or company that has used a similar scheme recently.
"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 with full retrospective effect is justified," said David Gauke, exchequer secretary to the Treasury. "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."
The government's action coincides with a surge in recent months of banks buying back debt from their subordinated bondholders. Banks that have launched debt exchanges include: Barclays PLC, Lloyds Banking Group PLC, Banco Santander SA, and Bank of America Corp.'s Bank of America Merrill Lynch. The debt buybacks were spurred by the relatively inexpensive price of the debt after costs dropped amid the financial crisis, and by the boost it provides to the banks' capital levels, something increasingly required by regulators.
The Treasury said the second tax-avoidance scheme, which was used by the same bank, involved using investment funds to convert non-taxable income into income entitled to a tax credit, which meant the bank was able get a "repayment" or credit from the Treasury on tax that hadn't been paid. The government will Monday introduce legislation to block any future use of the scheme.
--Art Patnaude and Jessica Hodgson contributed to this article.
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