Tax avoidance scheme closure will have retrospective effect, Treasury says

In a written ministerial statement (3-page / 43KB PDF), Exchequer Secretary to the Treasury David Gauke said that shutting down a debt buyback scheme, as well as a second scheme involving Authorised Investment Funds (AIFs), would ensure the payment of "over half a billion pounds in tax".

The change will be introduced as part of the Finance Bill 2012. In what the Treasury is describing as a "bold step not previously taken by this Government", the amendment will also capture certain arrangements entered into by the bank or any other company after 1 December 2011.

Tax law expert Eloise Walker of Pinsent Masons, the law firm behind Out-Law.com, said that the "retrospective closing of this loophole" was "worrying".

"It was just last year that the Government's Protocol on unscheduled announcements of changes in tax law gave us comfort that such retrospective changes would be 'wholly exceptional'. Less than a year later, here we are. This sets a very bad precedent and may do more harm than good to the UK economy in raising uncertainty of treatment," she said.

HMRC did not initially name the bank but Barclays has since said that it is the bank involved.

"This situation arose when Barclays voluntarily disclosed to HMRC in a spirit of full transparency that it had repurchased some of its debt in a tax efficient manner," said a Barclays statement. "This was based on guidance from professional advisors that the treatment was both legal and compliant with the tax code, and given others had used a similar treatment. Barclays also disclosed its participation in an authorised investment fund which is also legal and compliant with the tax code."

In its policy on unscheduled announcements of changes to tax law, made at the 2011 Budget, the Government said that changes which take effect from a date before the date on which they were announced would only be made in "wholly exceptional" circumstances.

"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," Gauke said.

Barclays has adopted the Banking Code of Practice on Taxation with a commitment not to engage in tax avoidance, the Government said. In his statement Exchequer Secretary to the Treasury Gauke said that the schemes were "not [transactions] that a bank that has adopted the Code should be undertaking".

The first scheme was set up to avoid paying corporation tax on a commercial profit arising to the bank from a buyback of its own debt. Normally a debtor company is taxed on the profit that arises when a liability is released for less than the amount borrowed, but special rules apply to connected companies.

In 2010, the Government changed the rules so that banks would be taxed if they bought back their own debt, which in many cases has fallen in value as a result of the financial crisis. Profits made in this way should, it said, be subject to corporation tax.

As well as ensuring that this principle could not be circumvented in future, Gauke said, any debt acquisitions made on or after 1 December 2011 will also be caught by the change.

The Treasury is also blocking future use of a second scheme which converts non-taxable income from AIFs into an amount carrying a repayable tax credit, resulting in a 'repayment' from the Exchequer of tax that has not been paid. Regulations to prevent the practice will come into effect immediately.

"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 is committed to creating a competitive tax system and we have brought in a range of corporate tax reforms, but we are absolutely clear that business must pay the tax they owe when they owe it," Gauke said.