RBS boss Hester admits bailed-out bank will be corporation tax-free zone
RBS is heading back to the black, and we should all be happy.
At least that was the message from the top of RBS towers.
“Every penny on or off our share price is £900m for the taxpayer,” was the basic argument of Stephen Hester, the bailed-out bank’s chief executive. But Project Merlin is not the end of the bank tax issue.
It is clear that RBS pays employer taxes, VAT and the new bank levy. Yet its corporation tax bill is rather interesting. It paid nothing, as it officially made a loss in 2010. Surprisingly perhaps, it stands to continue paying no corporation tax for years to come, even when it returns to profit.
That is because of a strange asset on its balance sheet detailed on page 79 called the “Deferred Tax Asset”. It is worth £6.3bn for RBS, and essentially is an “I Don’t OU” that Hester keeps in his back pocket, arising from RBS’s mammoth losses, which can be cashed in against future tax bills, indefinitely. This is one of the same reasons why Barclays paid only £113m of corporation tax on its 2010 profits.
Here is a transcript of an exchange between myself and Stephen Hester:
Me: Can you just clarify that there has been no corporation tax paid by RBS this year?
Hester: I would be delighted if we paid lots of corporation tax because it would mean we were making big profits. We did pay £4bn in lots of taxes and fees last year. Added to that this year is £400m for the bank levy. But the happiest person around, when that tax bill goes up, will be me because it will mean that our recovery is continuing, we’re making profit, our shareholders will enjoy those, including the government and so will the exchequer.
Me: This is an important point though it’s not just that you aren’t going to pay corporation tax this year, you have this deferred tax credit on your balance sheet as an asset, it means you wont be paying corporation tax for several years to come.
Hester: Well I think that when you look at the contribution RBS has made to the economy over a number of years there’s absolutely nothing that people shd be upset or worried about…
Me (interjecting): Just on the corporation tax: it’s true to say that you will not pay corporation tax for several years when you return to profit?
Hester: I think it’s true to say that there will be a period of time, it depends on our level of profitability when past losses are set against that, in the same way that we paid strong taxes earlier on when we were making strong profits, some of which turned out to be illusory, and were subsequently lost. There are swings and roundabouts. We’re no different from any business in the country like that.
Me: Its an asset on your balance sheet: some people will see it as a double bail out.
Hester: There’s no business in the country that doesnt carry losses forward… there’s a little bit of wanting cake and eating it in this debate.
Stephen Hester is right, of course. As I said Barclays do this, as do Lloyds, HSBC etc. In total it will be revealed that about £15bn of these negative tax bills will arise in UK banking. Not all can be used to offset the UK tax bill: so in RBS’s case its £3.8bn out of the £6.3bn. This is standard issue tax accounting.
But four issues arise:
1. Are UK rules allowing indefinite write-offs almost without end encouraging global banks to book more of their losses in the UK?
2. Why did this issue, which was acknowledged in the original Asset Protection Scheme negotiations to bail out RBS in February 2009, suddenly disappear by the time the formal APS contract was signed in November 2009. Stephen Hester told me today that this issue was not part of the negotiations.
3. Does it make sense to bail out a bank and save its massive losses from actually causing bankruptcy but then allow that same bank to use those losses to write off a tax bill?
4. Does this all make an even greater mockery of the tax commitments made in the much-hyped Merlin agreement?
I will be investigating this in the coming weeks. In the first instance however, why on earth banks (all companies in fact) cannot be made to publish a transparent account of their payable UK corporation tax, I do not know. They seemed to manage it fine before 2006.
* Stephen Hester does deserve a medal for one thing though.
(Perhaps a stainless steel one, because he does get paid an awful lot.) It’s fair to say that he takes his responsibilities as Chief Executive of a publicly saved part-nationalised bank very seriously. He always makes himself available for interview and explanation. He obviously was not at RBS as the hubristic horrors of Sir Fred Goodwin wrecked Britain’s banking giant. He has some interesting views on the Bank of England, suggesting that gradual predictable rate rises would be more welcome than shocks. Please listen to the interview.