Barclays tax-planning under investigation

The bank's tax planning has been described as a "sham" in a New York court briefing

In a court case starting today, the US Internal Revenue Service is facing off with the Bank of New York Mellon (BNY) over whether or not controversial tax planning measures that were designed by Barclays are legal.

The IRS claims that cross-border deals that Barclays prepared for the bank, as well as several other mid-sized ones like it, were in fact tax evasion, designed to exploit loopholes that exist in the difference between British and American laws.

The deal designed by Barclays is known as "structured trust advantaged repackaged securities" – STARS, for short – and it really is Byzantine:

Barclays required Petitioner [BNY] to transfer assets that produced income to a trust that would have a U.K. trustee so that the U.K. trustee, as a U.K. resident, would owe and pay U.K. income tax on that income. Of course, from Petitioner's perspective, Petitioner wanted a favorable borrowing rate but did not want to pay taxes twice on the same income. As between the U.S. and the U.K., Petitioner was neutral as to whom it paid its income tax; it just wanted to avoid being double-taxed.

That's BNY's description of the STARS deal. The IRS's is marginally simpler, and significantly more damning:

A U.S. taxpayer who pays $1 of foreign tax and claims $1 of foreign tax credit pays the same amount of tax as if it had paid the $1 to the United States. A U.S. taxpayer who pays $1 of foreign tax, is reimbursed for 50 cents of it by a counterparty, but still claims $1 of U.S. foreign tax credit comes out ahead by 50 cents.

If the counterparty simultaneously recovers the $1 of foreign tax through the foreign tax system, uses 50 cents of that to reimburse the u.s. taxpayer, and keeps the other 50 cents, then both parties are now ahead, each by 50 cents. But the US government has given $1 of foreign tax credit when no foreign tax was in fact paid.

Blown up to size, this is STARS.

Simplified, the case is over whether STARS existed to get BNY a good interest rate by borrowing in the UK, or whether it was a "sham" designed purely to pump the US government for tax credits. Between 1999 and 2006, the IRS claims that the six banks which were involved in STARS took $3.4bn in foreign tax credits. Five of those banks are now included in lawsuits with the IRS, although Barclays itself hasn't been implicated in any wrongdoing.

Despite this, it looks like life will be difficult for the bank, which is one of the leaders in the high-stakes tax planning world. The IRS crackdown follows HMRC retroactively forbidding Barclays from using a tax loophole in a "highly abusive" manner to buy back its own debt tax free. With governments worldwide facing pressure to pay down debt, and the "tax gap" being blamed for much of the difficulty, the bank is going to be facing an unprecedented level of scruitiny in its actions.

People queue to close their accounts. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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In your 30s? You missed out on £26,000 and you're not even protesting

The 1980s kids seem resigned to their fate - for now. 

Imagine you’re in your thirties, and you’re renting in a shared house, on roughly the same pay you earned five years ago. Now imagine you have a friend, also in their thirties. This friend owns their own home, gets pay rises every year and has a more generous pension to beat. In fact, they are twice as rich as you. 

When you try to talk about how worried you are about your financial situation, the friend shrugs and says: “I was in that situation too.”

Un-friend, right? But this is, in fact, reality. A study from the Institute for Fiscal Studies found that Brits in their early thirties have a median wealth of £27,000. But ten years ago, a thirty something had £53,000. In other words, that unbearable friend is just someone exactly the same as you, who is now in their forties. 

Not only do Brits born in the early 1980s have half the wealth they would have had if they were born in the 1970s, but they are the first generation to be in this position since World War II.  According to the IFS study, each cohort has got progressively richer. But then, just as the 1980s kids were reaching adulthood, a couple of things happened at once.

House prices raced ahead of wages. Employers made pensions less generous. And, at the crucial point that the 1980s kids were finding their feet in the jobs market, the recession struck. The 1980s kids didn’t manage to buy homes in time to take advantage of low mortgage rates. Instead, they are stuck paying increasing amounts of rent. 

If the wealth distribution between someone in their 30s and someone in their 40s is stark, this is only the starting point in intergenerational inequality. The IFS expects pensioners’ incomes to race ahead of workers in the coming decade. 

So why, given this unprecedented reversal in fortunes, are Brits in their early thirties not marching in the streets? Why are they not burning tyres outside the Treasury while shouting: “Give us out £26k back?” 

The obvious fact that no one is going to be protesting their granny’s good fortune aside, it seems one reason for the 1980s kids’ resignation is they are still in denial. One thirty something wrote to The Staggers that the idea of being able to buy a house had become too abstract to worry about. Instead:

“You just try and get through this month and then worry about next month, which is probably self-defeating, but I think it's quite tough to get in the mindset that you're going to put something by so maybe in 10 years you can buy a shoebox a two-hour train ride from where you actually want to be.”

Another reflected that “people keep saying ‘something will turn up’”.

The Staggers turned to our resident thirty something, Yo Zushi, for his thoughts. He agreed with the IFS analysis that the recession mattered:

"We were spoiled by an artificially inflated balloon of cheap credit and growing up was something you did… later. Then the crash came in 2007-2008, and it became something we couldn’t afford to do. 

I would have got round to becoming comfortably off, I tell myself, had I been given another ten years of amoral capitalist boom to do so. Many of those who were born in the early 1970s drifted along, took a nap and woke up in possession of a house, all mod cons and a decent-paying job. But we slightly younger Gen X-ers followed in their slipstream and somehow fell off the edge. Oh well. "

Will the inertia of the1980s kids last? Perhaps – but Zushi sees in the support for Jeremy Corbyn, a swell of feeling at last. “Our lack of access to the life we were promised in our teens has woken many of us up to why things suck. That’s a good thing. 

“And now we have Corbyn to help sort it all out. That’s not meant sarcastically – I really think he’ll do it.”