As a rule, I don't like to report when banks may have been engaging in tax shenanigans unless I am absolutely certain because (a) I don't want to falsely accuse the innocent and (b) I don't want to give them any good ideas, but I was fairly certain that a lot of the debt buybacks undertaken by RBS, Barclays and Lloyds (I'll put the links in later) had a tax angle to them and it seems that we now have the evidence if not the proof. I figured that there was something strange about the large profits without an abnormally large tax liability and no obvious source of tax losses to cover the difference.
Anyway, Stephen Timms today announced measures to stop tax advantages that have been achieved when companies buy back their issued debt at a discount to the amount borrowed.
Under current law, when a borrower is released from a liability for less than the amount borrowed it is taxed on the difference between the amount it has borrowed and the amount it pays to be released from its liability. Fair enough, but in situations where a company is in real dire straits and its debt is trading at virtually nothing, then any company that rescues it and repurchases its debts at a discount from the lenders and cancels the debt, would be pretty miffed if having bought the debt for 1p in the pound the borrower would get hit with 27.3p of tax for the forgiveness of 99p.
So the law allows that as a tax free event, but to prevent abuse of the exception, the law requires that the purchasing company should not have been connected with the borrower at any time in the three years ending 12 months before the debt is acquired, whch means that a white knight could buy the borrower and qualify for the exemption if the debt was bought back and cancelled within a year.
If we are to believe Mr Timms story, it looks like the banks were simply setting up new group companies to buy back the debts and claiming that the new company did not fall within the definition of connected company for these purposes because they did not exist in the relevant period. Fair enough, but bearing in mind that RBS made a £4 billion gain earlier this year, if it was structured this way - purely speculation, and it could have been Barclays - which UKFI appointed directors approved the creation of any group companies used to facilitate the deal?