Posted by Christie Malry on February 20, 2011 at 9:33 am
On Friday 18 February, The Guardian generated an enormous amount of public interest in the tax affairs of Barclays with an article that suggested that, in 2009, Barclays paid UK corporation tax at a rate of 1% instead of the statutory 28%. This caused inevitable howls of anguish from their left-wing readership. The timing was particularly unfortunate, as it came on the eve of a mass demonstration against Barclays arranged by UKuncut. It added a considerable amount of fuel to an already tense situation.
Even more unfortunate was the fact that the article was founded on five total howlers that mean virtually the entire content of the article is complete nonsense.
Here's where the article went wrong:
1) Cash paid in 2009 largely relates to earnings from 2008
The article compares the cash paid to HMRC in respect of UK corporation tax in 2009 (£113m) to the profits generated by the consolidated Barclays group in 2009.
In the UK, tax is paid in arrears, subject to a payment on account system. A large company like Barclays would certainly be making a payment on account. But, even so, a large slug of money paid in 2009 would relate to 2008, not 2009.
2) Barclays only pays UK corporation tax on its UK sourced profits
Multinational companies such as Barclays pay tax in a number of jurisdictions. Carving up the profit between the various countries in which it operates isn't a trivial exercise and, in some cases, profits may end up getting taxed twice - a nightmare for any CFO. However, generally speaking, Barclays only pays UK corporation tax on profits it generated in the UK. Anything earned outside the UK doesn't get taxed here.
So it's a howler to compare the UK corporation tax payment to the global consolidated profit. Most of that profit isn't taxed here in the first place.
3) Barclays 2009 consolidated profits include a significant disposal which is taxed differently under UK law
In arriving at a profit before tax figure of £11.6bn, The Guardian has added the profit from the ongoing business (£4,585m 1) to profits from a disposed business (£726m 2) and the gain made on disposal of that business (£6,331m 3) to reach a total of £11,642m.
In 2002 (yes, under Gordon Brown), the UK government introduced the Substantial shareholdings exemption, a corporation tax exemption for UK businesses disposing of a substantial shareholding in part of their business. The idea was that businesses should be more able to restructure their businesses without having to worry about unfortunate chargeable gains implications.
As explained in note 39 to the accounts, this means that the bulk of the gain on disposal isn't chargeable to UK corporation tax at all.
4) Barclays has brought-forward losses which alleviate the income that's taxable in 2009
It's a general principle under UK tax law that companies get much less favourable treatment of tax losses than of profits. At first glance this might be a bit counter-intuitive. When a company makes a profit it must make a tax payment. If it then makes a loss, shouldn't it get a tax refund to help it out?
Not so long ago, companies that made UK taxable losses were allowed to look back up to six years and 'carry back' those losses to a prior period. They could then demand a refund against tax already paid to HMRC. Over time, reflecting perhaps Gordon Brown's desperation for tax revenue, this has been tightened so that there is now only an unlimited carry back for one year. Losses above that must be carried forward to offset against future tax liabilities.
And that's what Barclays has done. In 2008 it offset global losses worth £859m against its tax bill 4. This isn't tax evasion; it's not even avoidance. It's a company that's made horrific losses being given some relief for those losses by tax authorities around the world. The utilisation of those losses will have reduced the amount of tax it handed over to HMRC in 2009.
5) Chuka Umunna is complaining about tax law introduced by his own party
The campaign of righteous anger being led by Chuka Umunna, a Treasury Select Committee member, is seeking to mobilise public protest against the Coalition. This rather overlooks the fact that Barclays made these profits in 2008 and paid tax on them in 2009. At this time the Labour party were in power.
Umunna should be writing to Gordon Brown and Alistair Darling to ask them why they did nothing at the time.
It's rare that an apparently reputable broadsheet newspaper such as The Guardian would allow itself to be associated with such a poorly constructed article as this. It's been picked up in the Daily Mail too. In fact, there are very good reasons why the cash payment to HMRC in 2009 might be substantially smaller than the global profits delivered in that year. In fact, the same is also true of the apparently ethical Co-Op bank.
Even worse, "facts" like those in the article tend to travel faster and more widely than the rebuttals which follow them. However, that's not going to stop me from reinforcing the facts of the UK tax system ahead of the UKuncut rhetoric.
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