Saturday, February 19, 2011

But Barclays 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.


  1. Drivel. Uk companies only pay UK corporation tax on profits earned in the UK (plus corporation tax on dividnds received from overseas subsidiaries subject to a pound for pound credit fo foreign income taxes paid by those subsidiaries).

    Barclays paid £113 million of UK tax because they only had £113/28% taxable profits arising in the UK, which is not surprising because all of their head office staff are based here.

    Barclays actually paid £1.5 billion of tax on that £6 bilion of profits, but most of that fell outside the UK.

    That may sound tough but the UK got to tax all the salaries in the UK (at a generally higher rate than the 28% at which it gave relief to the company for paying the salaries).

  2. Alex, are you saying that you know that the Head Office costs reduced the UK profits? If so why aren't these costs recharged to the operating subs as required by transfer pricing legislation?

  3. Why does the expression "Presumptive taxation", with the emphasis on the first word, strike a chill in my heart?

  4. David,

    Corporate tax is a bargain struck between tax inspectors and companies. This stuff about avoidance versus evasion is a bit of misnomer. A presumptive tax would weaken banks and strengthen tax payers.


  5. Iain,

    I am saying that I find the imbalance between PAYE payments, the high levels of reported profits and the low levels of CIT difficult to understand.

    I have looked at the online accounts of Barclays, and I find them a little lacking in transparency.