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Sunday, 22 March 2009

Some further thoughts on Barclays and tax

One of the conclusions from the leaked Barclays tax papers was that they assumed substantial provisions would be made against the forecast tax savings. On the one hand one might say that this is just normal prudence from a bank. On the other hand one might conclude that Barclays effectively admit that their tax schemes are aggressive by making such provisions.

As an aside, the pap[are submitted for approval seem to be entirely predicated on the receipt of an acceptable legal opinion from a firm of lawyers or accountants. Whilst that is both desirable and necessary, there doesn’t appear to be much consideration within Barclays at this level of the tax risks. There may well have been a tendency towards US practices where the opinion is not necessarily drafted to give the fairest view of the transaction, but to give the advice most likely to give the client (Barclays) the accounting treatment they need, whilst satisfying the advisers opinion or risk committee that they ran an acceptable risk in giving the opinion, which in turn depends on their professional indemnity insurance. The whole game then becomes not an exercise in getting the best and safest long term deal for shareholders but an exercise in maximising accounting profits, even if some of the forecast savings are only moderately secure (albeit addressed in a legal opinion).

It is unclear from Barclays annual reports and other financial statements exactly how much they have provided for potential unsuccessful tax claims. No doubt any questions would be answered by a “We do every thing in accordance with normal business practice as advised by legal counsel and other advisers” sort of response, but if Barclays were to fall under the control of the government, but it is likely that if the bank was taken over, not only would the tax avoidance business be halted, but the bank would be required to settle any unagreed tax returns, not doubt in the government’s favour.

No data is given in the 2008 results released in February and the section of the notes regarding Legal Proceedings contained the following uninformative statement:

Barclays is engaged in various other litigation proceedings both in the United Kingdom and a number of overseas jurisdictions, including the United States, involving claims by and against it which arise in the ordinary course of business. Barclays does not expect the ultimate resolution of any of the proceedings to which Barclays is party to have a significant adverse effect on the financial position of the Group and Barclays has not disclosed the contingent liabilities associated with these claims either because they cannot reasonably be estimated or because such disclosure could be prejudicial to the conduct of the claims.”

It is not normal practice for banks to report on the number of tax return submissions that have not yet been agreed with HMRC, nor the amounts at stake. Indeed, because “such disclosure could be prejudicial to the conduct of the claims” banks rarely disclose the amounts at stake until a case against the Revenue has been lost, but in Barclays case, we can infer from the number of people working in the tax based structured finance unit (110) and the very high bonuses paid (often in the millions and, in some cases, tens of millions), that the amounts at stake with the Revenue are also very substantial.

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