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Barclays will have to have to pay an estimated £500 million to HMRC, following the government's decison to shut down two corporate avoidance schemes.
The aim of the first was to ensure commercial profit arising from a buyback by the high street bank of its own debt was not subject to tax.
New legislation will be introduced in Finance Bill 2012 to prevent future use of the arrangement, which Barclays made known to the Revenue under the disclosure of tax avoidance schemes (DOTAS) regime.
The revamped rules will also act retrospectively to block the scheme's use by the bank between 1 December 2011 and 27 February 2012, and the use by any company that engaged in a similar arrangement over the same period.
The legislation will amend CTA 2009, s 362 and insert a new s 363A to modify the corporation tax rules on loan relationships that apply when parties to a loan relationship become connected.
It signals a change to the circumstances in which companies that become connected with pre-existing debt bring in a deemed release in respect of that debt, and the calculation of the amount of that deemed release.
The amendment will also insert an anti-avoidance rule to ensure existing guidelines relating to deemed releases can not be circumvented. The new measure will apply when arrangements are entered into where the main purpose, or one of the main purposes, is to avoid or reduce a deemed release that would otherwise have arisen under the existing rules.
The second scheme revealed by Barclays under DOTAS involved authorised investment funds. It was designed to convert non-taxable income into an amount carrying a repayable tax credit, in an attempt to secure repayment of tax that had not actually been paid.
The Exchequer secretary to the Treasury, David Gauke, noted that Barclays had signed up to the banking code of practice on taxation, which contains a commitment not to engage in avoidance.
‘The government is clear that this is not a transaction that a bank that has adopted the code should be undertaking,’ he said.
Tom Cartwright of law specialists McGrigors claimed the government's decision to give retrospective effect to the altered legislation indicated it been ‘designed specifically to catch Barclays’, a move he described as ‘extraordinarily aggressive’.
‘Barclays was using a structure that was reasonably well-known in the market to effect a debt buy-back in a tax-free manner,' said Mr Cartwright.
‘The bank, or anyone else who undertook the scheme after 1 December 2011, may have a claim under the Human Rights Act. However, succeeding in such a claim is invariably difficult because retrospective legislation is not automatically contrary to the Act.’
