Has Barclays’ attempt to avoid more than £500m in UK tax dealt a lasting blow to the bank’s nascent efforts to put better citizenship at the heart of a new feel-good corporate agenda?
HM Revenue & Customs’ announcement that it has closed down two “highly abusive” schemes designed by the bank has thrust Barclays’ tax practices back into the spotlight, at a time when the bank is trying to rebuild its reputation with politicians and the public.
For Bob Diamond, the bank’s US-born chief executive, HMRC’s sudden crackdown could not have come at a more uncomfortable time. A fortnight ago, Barclays’ chose to devote the front page of its 2011 results announcement to “citizenship” – heralding the bank’s commitment to “reinforcing” its business integrity every day and “making responsible decisions in how we manage the business.”
Barclays’ insiders say they are genuinely shocked by the government’s announcement, emphasising that both schemes had been signed off by the bank’s professional advisers and were voluntarily disclosed. Several tax experts say that one of the arrangements, which involves minimising tax on the buyback of its own debt, appears to implement a structure that is already reasonably well-known in the market.
“Barclays takes its responsibilities as a corporate citizen very seriously,” the bank says. “Barclays ensures that all transactions that it undertakes are fully in accordance with relevant tax law wherever it does business. In the UK we comply with the letter and spirit of all our obligations under the HMRC Code of Practice, and we have open and transparent dealings with HMRC.”
But to long-term watchers of Barclays’ tax affairs, the government’s tough action on Monday signalled ongoing frustration with the bank’s tactics.
“They don’t understand that it’s no longer a game of who’s the smartest person in the room,” says one senior tax executive at a rival bank. “The environment has changed.”
Barclays has long been considered one of the biggest operators in the niche world of structured tax planning, with a team of experts dedicated to helping its clients to reduce their tax bills, in part by taking advantage of gaps between international tax and accounting systems.
Known internally as structured capital markets or “SCM”, the unit was once a core source of revenues for Barclays’ rapidly expanding investment bank, then headed by Mr Diamond. But it became a frequent target of criticism after the financial crisis, both for its planning strategies and its perceived willingness to take on reputational risk.
In 2009, the Guardian newspaper published leaked documents about a series of separate tax arbitrage schemes allegedly engineered by SCM between 2006 and 2007.
While there was no suggestion at the time that those schemes, identified in the leaked documents under code names such as “Project Knight” were illegal, Barclays was accused of helping clients to minimise their tax burden by pushing funds through a complex web of offshore companies in low-tax jurisdictions such as the Cayman Islands, the Netherlands and Luxembourg.
No formal action was taken at the time, and Barclays has always insisted that all of its activities comply with domestic and international tax laws. SCM has since sought to keep a lower profile, although it has not been disbanded.
But questions over the bank’s tax arrangements and planning have continued to dog both Barclays and Mr Diamond. Early last year, in an appearance before the UK’s Treasury committee, Mr Diamond told MPs: “Payment of tax is an important responsibility of businesses. I can assure you Barclays is not evading taxes.”
In a widely-publicised response to a written question raised at that hearing, Mr Diamond later revealed that the bank had paid £113m in corporation tax in 2009, a year in which it made £11.6bn in profits, and operated dozens of subsidiaries in jurisdictions with favourable tax regimes.
In September, the Financial Times revealed that Barclays had marketed a series of complex structured finance products that allowed US banks to generate billions worth of foreign tax credits, several of which have been challenged by the US Internal Revenue Service.
Analysts said HMRC’s crackdown on Monday reinforced the heightened scrutiny banks now face over their role in society, where their results are increasingly measured not only in terms of profit and loss, but by how they are supporting real economic growth, while protecting taxpayers from having to bail out the financial system.
“Diamond has brought ‘citizenship’ right to the front,” says Bruce Packard, an analyst at Seymour Pierce. “If the bank appears to be acting inconsistently with this citizenship message, management risks alienating retail customers, politicians and regulators.”