Lloyds Bank Fails In Court Bid To Avoid GBP54m Tax Bill

by Robin Pilgrim, LawAndTax-News.com, London

16 November 2009

A long-running legal battle between Lloyds Banking Group and HM Revenue and Customs, the UK tax authority, looks set to rumble on after a judge decided that the bank was liable for more than GBP50m in corporation tax resulting from its cashing in of derivative contracts.

The facts of the highly complex case date back to 2003, when HBOS Treasury Services, a division of the troubled HBOS bank, itself now part of the Lloyds Banking Group which is part owned by the UK government, wanted to liquidate derivative contracts it held with the American financial services giant AIG.

AIG agreed to monetize the swaps for GBP180m, in return for a payment of GBP2.2m from HBOS. But, in an alleged bid to avoid UK tax on the proceeds, HBOS established a Cayman Islands subsidiary named Dorus Investments, into which the derivatives were transferred. Dorus itself was then sold on to the insurer Swiss Re, the intention being, according to Judge Howard Nolan sitting in the UK's first-tier tax tribunal, that when Dorus was sold, the buyer would be able to make the GBP54m corporation tax liability on the swaps "evaporate."

The result of the transaction was that HBOS Treasury Services was able to recognize a deferred tax asset of GBP54m. However, in his recently published decision, Judge Nolan was of the view that the transactions had no economic rationale and were structured purely to avoid tax.

HBOS has not commented publicly on the ruling because it intends to appeal and therefore legal proceedings are ongoing.

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