Barclays Pledges Compliance as Britain Closes Tax Loopholes

Barclays Plc (BARC), which says banks need to become better citizens, will comply with the government’s decision to close two tax loopholes it exploited and which the U.K. Treasury called “highly abusive.”

The U.K. yesterday closed two “aggressive” tax-avoidance programs that could have deprived the public purse of more than 500 million pounds ($793 million), the Treasury said. The retrospective change in the law won’t have a material impact on Barclays’s profit, the London-based lender said in a statement.

The disclosure comes less than three months after Chief Executive Officer Robert Diamond called on banks to be more “effective citizens.” Barclays is also a signatory to a 2010 code under which banks pledged to obey the spirit as well as the letter of British tax laws. The lender paid 2.9 billion pounds of tax in Britain in 2011.

“Diamond has brought ‘citizenship’ right to the front,” Bruce Packard, an analyst at Seymour Pierce Ltd. in London, said in a note to clients today. “If the bank appears to be acting inconsistently with this citizenship message, management risks alienating retail customers, politicians and regulators.”

The bank fell as much as 1.8 percent and was down 0.8 percent at 241.95 pence at 3:40 p.m. in London, the second- biggest decline in the five-member FTSE 350 Index (F3BANK) of U.K. banks.

The cost of terminating the plan may be as much as 150 million pounds for Barclays, according to a person familiar with the plan, who asked not to be identified because the talks are continuing. The bank was surprised by the response when it presented its plan to the tax authorities, the person said.

‘Difficult Explanations’

“They haven’t actually broken the law, but they haven’t acted according to its spirit,” U.K. Treasury Minister David Gauke told BBC Radio 4 today. “I suspect the bank in question is regretting what it has done. It’s not going to do them any reputational good. They will have difficult explanations to some of their customers.”

Barclays said it voluntarily disclosed to Her Majesty’s Revenue and Customs that it had bought back some of its own debt in a tax-efficient manner, the lender said in its statement. It also disclosed to the tax authority that it had invested in a fund in a tax-efficient way, the lender said.

“The reaction of the man and woman in the street who just work and pay their taxes will be incredulity,” said John Cryer, a Labour member of the House of Commons Treasury Committee. “Barclays must have been really trying it on. People like Diamond see themselves as the new Olympians. They really think they’re above the rest of us.”

‘Effective Citizens’

Banks also have to accept responsibility for the 2008 financial crisis and must “use the lessons learned to become better and more effective citizens,” Diamond said in a British Broadcasting Corp. lecture three months ago. In 2010, Barclays and 14 other banks with U.K. operations adopted a government code pledging they would “follow the spirit of the law in addition to the letter” of British tax rules.

Spokesmen for HSBC Holdings Plc (HSBA) and Lloyds Banking Group Plc (LLOY) said their firms hadn’t participated in similar tax plans. Royal Bank of Scotland Group Plc (RBS) bought back some of its own debt at a discount in April 2009 and again in April 2010.

The Edinburgh-based bank didn’t pay tax on the 2009 transaction because it was implemented before the lender signed up to the code in 2010, said a person briefed on the matter. The Treasury hasn’t told the lender it will seek to reclaim the tax, said the person, who declined to be identified because the bank’s tax dealings are private. The lender paid tax on the second transaction, the person added.

‘Not Evading Taxes’

Diamond told British parliamentarians in January 2011 that the bank doesn’t evade taxes and pledged to examine the number of off-shore operations it has.

“Barclays is not evading taxes,” he told a Treasury Committee hearing at the House of Commons in London at the time. “We are complying with the spirit and the letter of the law.”

Banks also have to accept responsibility for the 2008 financial crisis and must “use the lessons learned to become better and more effective citizens,” Diamond said in a British Broadcasting Corp. lecture three months ago. In 2010, Barclays and 14 other banks with U.K. operations adopted a government code pledging they would “follow the spirit of the law in addition to the letter” of British tax rules.

Separately, the Financial Ombudsman Service, Britain’s financial adjudicator, said today it received more than 11,500 complains about Barclays in the second half, more than any other U.K. bank, according to a statement posted on its website.

To contact the reporter on this story: Howard Mustoe in London at hmustoe@bloomberg.net.

To contact the editor responsible for this story: Edward Evans at eevans3@bloomberg.net

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