No winners from Barclays tax crackdown

February 29, 2012

By Peter Thal Larsen

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Barclays’ UK rehabilitation is proving a struggle. Just a few months after chief executive Bob Diamond set out the lender’s credentials for good corporate citizenship, it has been whacked for avoiding UK tax. The episode is another reminder that banks face higher levels of scrutiny. But the UK government’s willingness to jeopardise Britain’s predictable tax system is more worrying.

There’s nothing illegal about avoiding tax. As long as they obey the law, companies are free to organise themselves in a way that minimises their tax liability. Indeed, their responsibility to shareholders means it would be irresponsible to pay more than necessary. However, avoiding UK tax has become a giant industry in which bankers, lawyers and accountants find new loopholes which the government then closes down. It’s an arms race the authorities have tended to lose.

The financial crisis has cast a new spotlight on this practice. For banks which have benefited – directly or indirectly – from taxpayer support, the scrutiny has been particularly intense. UK banks – including Barclays – have signed a code of practice which includes a commitment not to engage in tax avoidance.

Judged by this standard, Barclays’ wheezes look hard to justify. The first allowed the bank to avoid paying corporation tax on the profit generated by buying back its own debt at a discount to face value. The second created a credit which could be reclaimed from the government even though no tax had been paid. It’s hard to see how the schemes can be reconciled with Diamond’s recent statement that banks’ activities must “serve a social purpose and meet a real client need”.

But that doesn’t make it any easier to stomach the government’s decision to pass retrospective legislation. Closing the loophole will save 500 million pounds, though Barclays probably accounts for less than 150 million pounds of this, and other companies the rest. The financial gain to the exchequer could be dwarfed by the damage to Britain’s reputation for maintaining a predictable tax system – a reputation already dented by the 2009 bank bonus tax and last year’s increase in the levy on North Sea oil producers. In the end, both Barclays and the UK government may emerge as losers from the crackdown.

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