Saturday, 19 February 2011

But we are only complying with the law

Shamed by their excessive use of tax avoidance schemes, Barclays have fallen back on the excuse of last resort; "we are only complying with the law".

As an aside, Barclays has a less than perfect record of following the requirements of UK legislation, as various judgements from the Financial Services Agency will attest. Moreover, UK corporate tax law is notoriously complex. It is an unequal struggle between the slick accountants from Barclays and the disaffected and underpaid tax inspectors of her Majesty's Customs and Excises.

Still, it is hard to understand why tax inspectors can't squeeze more corporate tax payments from Barclays. The company just reported their results online and 2010 was a very good year. Profits amounted to about £6 billion. Roughly speaking, around a third of these profits came from retail banking operations, the bulk of which were generated in the UK. The remainder came from Barclays capital, the investment banking operation primarily based in London.

For tax liabiilities, location matters. Corporate income tax, in theory, should be levied on the profits made by firms in a given geographical region. Judging by the financial statements, the majority of Barclays operations as well as their employees are based in the UK. Yet curiously these UK operations never seem to generate significant amounts of corporate income tax payments.

Barclays have tried to hide the paltry amounts of corporate tax payments by publishing the total tax amounts that the company paid over to the Exchequer. For example, they have included the amounts of PAYE paid by their employees. In 2009, the bank paid around £2 billion over to HM Revenue & Customers, although £113 million was corporation tax.

This only adds to the mystery as to why corporate income tax payments are so low. High levels of PAYE payments point to high underlying salary payments. Normally, companies don't pay out massive wads of cash unless their workers are generating large profits. Aren't bank bonuses supposed to be tied to profits?

Companies have an incentive to hide those profits from the taxman. Otherwise, how could one explain the massive financial flows into the Cayman Islands; a barren rock in the middle of the Caribbean. Banks have taken advantage of the complexity of corporate income tax regulations. They have arranged their financial operations so that they are now effectively liberated of any responsibility to pay taxes.

However, our Parliament is sovereign. We can determine our own tax laws. If the political will was there, Barclays would not be able to avoid taxes in such a scandalous way.

One simple way forward would be for corporate income tax on banks to become a presumptive tax. At the end of every quarter, the bank would have to pay a fixed proportion of its PAYE contributions as an advance payment on future corporate income tax liabilities. A rate between five and 10 percent would be reasonable.

These funds could be held in escrow accounts. At the end of the year banks would have to justify why those profits should be allocated to offshore centres. If they can genuinely prove that the profits were generated through operations conducted abroad then they can receive a rebate on corporate tax payments. However, the level of proof required would have to be extremely high.

The idea isn't that radical. Presumptive taxation is quite common worldwide as well as advance payments on corporate income tax. It would offer a way of genuinely cracking down on these outrageous tax avoidance schemes that banks have abused for years. If Barclays don't like it, then they put all their ATMs on the Cayman Islands.


Anonymous said...

I don't know the numbers for I would suggest that losses made by Barclays in the previous financial year were rolled forward, which is perfectly legal, to offset net profit made. Hence the Corporation Tax liability is reduced. As for bonuses, these constitute staff remuneration and are deducted before calculation of Corporation Tax - again perfectly legal.

I'm not an accountant; just someone who has run his own very small company for 20 years. I have made losses - especially in my early years - and legally rolled these forward. I also understand what is an allowable deduction before Corporation Tax. What people are presently calling 'tax avoidance', as if this is illegal, are perfectly legitimate. I've done and do all these things.

I downsized my company and fired 14 people in recent times because I was fed up with paying everyone else - especially the tax man - more than I was getting. And I was fed up of employing one person just to deal with red tape. I'm much happier now, work fewer hours and this year I'm planning a holiday - the first for two years.

Whatever the anger towards banks and companies generally at the moment, companies produce wealth and employ people. Companies are the secret of prosperity. Right now the conditions in the UK for business are sh*t. A lot has to happen to put this right and get people back to work. Everyone working for the government with massive salaries, gold-plated pensions and six weeks holiday per annum is not the answer.

james c said...

Barclays and other banks are carrying forward past losses and setting them against tax. There is nothing wrong with this in principle.

However, it is absurd that Barclays and other banks can have their losses refunded by bailouts and soft interest rates and also enjoy these tax losses as well.

bill said...

Remind me again, did Barclays receive a bailout from the UK tax payer?

H said...

Seems to be a good take on the subject.

Anonymous said...

A company that I used to work for had an effective way of minimising tax. The bulk of their profit came from aiding the government (actually, they helped save a lot of money), but it was a subsidiary of a large Italian parent company.

So what they did to 'hide' their profits was increase the payments that they made, per quarter, to the Italian parent company. Then, no doubt, the parent company had it's own dvious tax avoidance schemes in place.
I would guess that some of Barclays' profits would be masked/protected in a similar way, with profits reduced by payments to a parent company located somewhere with the good fortune of having low/0% corporate tax, such as ooooh Bermuda.
What a joke.

Patrick Mulvey said...

The best way to resolve this issue is to look at the tax reconciliation in the taxation note in the latest annual report and accounts.