Government concerned about tax avoidance by banks

BANKING:Government concerns in 1982 over the way banks, particularly AIB and Bank of Ireland, were avoiding tax are highighted in official documents released under the 30-year rule.

Tax-avoidance schemes being used by banks in 1982 were costing the exchequer more than €63 million (£50 million) a year, according to newly released State papers.

A memorandum for government from the Department of Finance in January 1982 said the banks were “the most profitable concerns in the private sector” and were minimising their tax bills through the use of tax-avoidance schemes.

The two main banks, AIB and Bank of Ireland, had pretax profits of €133 million (£105 million) in 1981, the memo said, and had a combined tax provision of only €19 million (£15 million).

The bulk of the £50 million saved through tax avoidance involved a leasing scheme. Under it, banks bought plant and machinery and availed of capital allowances and “very often” grants from the Industrial Development Authority. This reduced their tax liability and enabled them to lease the equipment at favourable terms to lessees.

‘Cheap finance’

“These arrangements are attractive to industrialists and others who expect to have a low or nil tax liability and are thus not in a position to benefit from capital allowances if they purchased the equipment themselves,” the memo said. Industrialists were obtaining “cheap finance” under the scheme.

The bulk of the leasing was being carried out by AIB and Bank of Ireland.

Other tax-avoidance schemes included the use of section 84 of the Corporation Tax Act, 1976, and preference share financing, which together accounted for a loss of £10 million in tax. The section 84 scheme involved constructing a loan in such a way that the interest was treated as a dividend for tax purposes so that the bank was not liable for tax on the interest it received. The preference share scheme involved banks buying shares in companies that did not expect to have a tax liability instead of giving them loans. The dividends paid were not liable for tax.

The minister for finance at the time, John Bruton, believed there should not be “unintended and hidden exchequer subsidies” to industry and other sectors, the memo said. State control of aid to industry was vital.

“The devices employed are structured to come within the law – though they are abuses of it,” the minister believed.

“The integrity of the tax system must be apparent if it is to retain general acceptance.”

‘Hidden subsidies’

He believed it was “most undesirable that hidden subsidies”, through “an abuse of the legislation” or which came about “gratuitously” should have to be relied on to provide cheap finance for industrialists. The aids available to industry were already generous, the memo said, with the sector receiving £428 million in 1981 through direct and indirect aid. There was also a 10 per cent tax rate for manufacturing.

The minister proposed restricting the leasing scheme over three years so the capital allowances would not be capable of reducing the banks’ profits below certain minimum amounts.

He also proposed closure of the section 84 and preference share “loopholes”.

There was no note on file of the outcome of the government meeting. But in a public statement made the following month, the minister announced a bank levy would be introduced of £15 million pending the publication of a report from the Commission on Taxation.