Britain’s banks are avoiding billions in tax, using an accounting loophole, The Times reported on 1 March.
Banks borrow money by issuing IOUs called ‘bonds’. If confidence in a bank grows, the value of its bonds increases, and it could in theory cost more to buy back the bond than to pay off the money owed.
Using the ‘fair value on own credit’ rule, a bank could then enter a loss in its accounts. The loss is the extra money that it would theoretically cost the bank to buy back its own bonds, even though it won’t ever actually buy any back.
Barclays’ accounts for 2012 included a notional loss of £4.58bn under this heading. This was the main device that helped to cut taxable profits from £7bn to just £246m.
RBS’s 2012 accounts included notional losses of £4.65bn, which helped mightily in turning the group’s taxable profit from a profit of £3.4bn into a loss of £5.2bn. If a bank makes a loss, it doesn’t have to pay any taxes.