News that Barclays (LSE: BARC.L – news) has fallen foul of the authorities for highly abusive tax avoidance schemes will not come as a surprise to those who follow Britains banks.
Barclays has long been perceived as the most aggressive player in the tax structuring business, devising products that arbitraged the rules to reduce clients bills. At its peak, Barclays even turned a part of its operation structured capital markets (SCM) over to tax avoidance.
SCM, under Roger Jenkins, became a huge profit engine. In one year, it was reported to have made 1bn for the bank and, shortly afterwards, Jenkins shot to notoriety as Barclays best-paid employee pocketing a reputed 40m a year. As SCM sat within the investment bank, Barclays Capital, the details were never properly disclosed, but never officially rebutted either.
Though legal, the behaviour raised ethical questions that came into particular focus after the financial crisis as, although Barclays never received direct taxpayer support, it relied at times on state funding schemes to keep afloat.
The backlash began in 2009, when Barclays hit the headlines after a whistleblower leaked documents to the Liberal Democrats which purported to show that it was using a network of subsidiaries in the Cayman Islands and Luxembourg to minimise clients taxes.
Barclays had the story injuncted on the grounds that the material was commercially sensitive, but its reputation took a hit and questions began to be asked about how much tax the bank itself was avoiding.
Early last year, it was forced into an embarrassing admission. In front of the Treasury Select Committee, chief executive Bob Diamond, who had nurtured SCM when he was head of BarCap, was forced to reveal that the bank operated nearly 300 subsidiaries in tax havens and had paid just 113m of corporation tax in the UK in 2009 a year in which it handed out 3.4bn in bonuses.
Since then, the questions have not gone away. Politicians have queried whether a bizarre deal struck in 2009 to move billions of toxic assets off its balance sheet was not just a tax ruse. The Protium arrangement raised such serious concerns in the US that the authorities would not let it drop until the deal was unwound at great expense to shareholders last year.
Analysis of Barclays accounts by The Daily Telegraph has raised further questions. According to the 2010 results, the bank generated 591m in tax losses carried forward despite making 6bn of profits before tax. The tax gain suggested the bank crystallised 2bn of losses that year, which the annual report said mainly relates to entities in the USA, the UK and Spain.
However, Barclays would not disclose where the 2bn of losses were incurred once again muddying the waters. The bank now has assets that it can offset against future tax payments that are almost as large as Royal Bank of Scotland and Lloyds Banking Group (LSE: LLOY.L – news) . While both the state-backed banks made huge visible losses, Barclays has reported profits every year for more than a decade.
Barclays has previous when it comes to tax avoidance