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How Barclays tax avoidance schemes worked

The Treasury stunned the City on Monday by taking action to stop the bank using two schemes to avoid paying more than £500m in tax

When banks started to buy back their debt – such as bonds they had issued – after the financial crisis they were able to do so at prices lower than the debt had been issued at. This generated a profit. The Treasury then introduced rules to make sure that banks paid corporation tax on these profits.

The Treasury on Monday announced legislation that tackled the situation where banks had bought back their debt through an unconnected company – and was therefore not liable for tax – even if the company later became part of the group.

The Treasury said there have been two written ministerial statements setting out the requirement for banks to pay tax on these profits but said “the bank has now entered into a scheme using contrived arrangements that once again seeks to ensure that the profit on a buyback of such debt is not subject to corporation tax”.

It also, unusually, made the rule change retrospectively from December 1 because of “the history of previous abuse in this area”.

The second avoidance scheme exploited rules covering authorised investment fund regulations to generate a repayment of tax (whether directly or by setting off against other liabilities) that has never been paid. The idea is that non-taxable income can be converted into a sum that carries a repayable tax credit.

The government described this as a “contrived arrangement” which is against the spirit of the law. It is understood that Barclays had devised this scheme on behalf of a client. © 2012 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds