Lloyds’ disputed tax bill over Irish losses soars to £800m

Lloyds Banking Group, which has been in a standoff for more than six years with UK authorities over the tax treatment of Irish crisis-era losses, has seen its potential related bill soar by a third during the period to £800 million (€954 million).

Lloyds disclosed in its 2013 annual report that Her Majesty's Revenue and Customs (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.

The group said in its latest full-year results statement, published on Thursday, that the matter remains open.

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“If HMRC’s position is found to be correct, management estimate that this would result in an increase in current tax liabilities of approximately £800 million (including interest) and a reduction in the Group’s deferred tax asset of approximately £250 million,” it said.

“The group does not agree with HMRC’s position and, having taken appropriate advice, does not consider that this is a case where additional tax will ultimately fall due.”

A spokeswoman declined to comment beyond the statement in the earnings release, while a spokeswoman for HMRC said that taxpayer confidentiality precluded the authority from commenting.

Loses fight

The increase in the current tax liabilities and decline in the deferred tax assets under threat 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 loses its fight.

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 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’s latest results showed that its profits slumped by 26 per cent last year, hit by increasing bad debts and billions of pounds of customer compensation.

Provisions to cover payouts to customers mis-sold payment protection insurance (PPI) in the UK reached nearly £2.5 billion in 2019, dragging down pretax profit to £4.4 billion.

Bad loans

Impairments on bad loans spiked to £1.3 billion, up from £937 million the previous year, as weakening second-hand car prices hit its motor finance business and two large company failures hit its commercial division.

Chief executive Antonio Horta-Osorio remained upbeat despite the profit downturn, saying the economy remains “resilient”. Though there is uncertainty over Britain’s post-Brexit trading relationships, the country now has “a clear sense of direction”, he said. – Additional reporting: Reuters