Lloyds takes €1.26bn tax row over Irish tax losses to appeal

The group recorded €14.8bn in losses on its Irish loan book after the 2008 crash

Lloyds inherited Bank of Scotland’s €32bn Irish loan book under its rescue takeover of HBOS in 2008. Photograph: Andy Rain

Lloyds inherited Bank of Scotland’s €32bn Irish loan book under its rescue takeover of HBOS in 2008. Photograph: Andy Rain

 

Lloyds Banking Group has failed to convince Her Majesty’s Revenue and Customs (HMRC) that it is entitled to claim tax relief on massive losses racked up in the Republic during the financial crisis.

Following a long dispute on the issue, the British bank has decided to appeal the decision to the UK’s First Tier Tax Tribunal, with a hearing expected in early 2022, it said in its annual report for 2020, published on Wednesday.

The bank faces a total £1.08 billion (€1.26 billion) financial hit if it is unsuccessful in its appeal, comprised of a potential £810 million accumulated tax bill, including interest, and loss of £270 million of so-called deferred tax assets (DTAs). DTAs are essentially the use of past losses to lower future tax bills.

“In 2020, HMRC concluded their inquiry into the matter and issued a closure notice. The group’s interpretation of the UK rules has not changed and hence it has appealed to the First Tier Tax Tribunal, with a hearing expected in early 2022,” the banking giant said. “The group, having taken appropriate advice, does not consider that this is a case where additional tax will ultimately fall due.”

A spokeswoman for Lloyds declined to provide The Irish Times with a copy of the closure notice or comment on its contents.

Rejected

Lloyds first disclosed in its 2013 annual report that HMRC had rejected how the bank had used losses built up by its defunct Bank of Scotland (Ireland) unit following the crash to reduce taxes paid by the group in the UK.

At the time, the bank estimated that its tax liability as a result of the case could be £600 million, and that it would reduce its level of deferred tax assets by about £400 million.

Lloyds inherited Bank of Scotland’s €32 billion Irish loan book under its rescue takeover of HBOS in 2008. The group handed back its Irish banking licence to the Central Bank in 2010 and began to sell off its mainly impaired local loans at deep discounts. The bank off-loaded its remaining €5 billion of Irish mortgages in 2018.

The increase in the current tax liabilities and decline in the deferred tax assets under threat since 2003 suggest that Lloyds has continued to offset accumulated Irish losses against profits elsewhere since the initial 2013 dispute for tax purposes, according to analysts. The increase in the liability also reflects interest that would fall due if Lloyds ultimately loses its fight.

Impairment charges

The group recorded €14.8 billion in losses on its Irish loan book after the 2008 crash, including impairment charges on soured debt and shortfalls sustained as it disposed of loan portfolios, according to Irish Times calculations, based on company filings.

Lloyds, the UK’s biggest domestic lender, reported £1.2 billion of pre-tax profits for last year, down from £4.4 billion for 2019, after setting aside £4 billion to absorb an expected surge in bad loan losses resulting from the Covid-19 economic crisis. Still, the result for the year beat the consensus view among analysts that the bank would post a £905 million profit.