Bank reveals it is in a £1bn tax dispute with HMRC over the way it has used losses from its Irish buisness to cut its tax bill
Lloyds Banking Group faces a £1bn tax demand from HMRC related to billions of pounds of loss taken in Ireland by the state-backed lender as it wound down its defunct Irish subsidiary.
The lender revealed it was warned in the second half of last year that the UK tax authorities were not happy with its treatment of Irish losses to offset its tax bill, prompting a legal dispute between Britain’s largest retail bank and HMRC.
If the case is decided in HMRC’s favour, Lloyds has said its tax bill will rise by £1bn, with the bank forced to pay a further £600m of tax, as well as write off a £400m deferred tax asset that it would currently be able to write off against future profits.
In a statement to investors the bank 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.”
The disclosure of the tax dispute came as Lloyds published its full-year results, which showed the lender had made a pre-tax statutory profit of £415m, reversing a loss in 2012 of £606m.
On an underlying basis, which strips out provisions such as the £3.1bn set aside for payment protection insurance compensation costs, the bank made a profit of £6.2bn.
The profit is the bank’s first in three years and led Antonio Horta-Osorio, chief executive of Lloyds, to confirm he would accept a £1.7m all-share bonus for 2013. The bonus will be deferred until 2019 and will be subject to several performance hurdles linked to the future performance of the business.
As well as Mr Horta-Osorio’s own bonus, Lloyds confirmed it had put aside an overall staff bonus pool worth £395m, equating to an average payout to each of the bank’s staff of £4,500.
Sir Win Bischoff, chairman of Lloyds, said the payment of the bonuses was “proportionate and fair”, adding that the payouts at the bank were “lower than anyone else”.
In an unscheduled update this month, Lloyds pre-released its underlying profit and PPI provision figures as they differed materially from market expectations.
Mr Horta-Osorio said Lloyds had been transformed into a “normal bank”, five years on from its state-funded rescue that saw the taxpayer take a 39pc stake in the bank, since reduced to 33pc.
Lloyds is in the process of preparing a prospectus for a second sale of the state’s holding in the bank that is expected to see the Treasury authorise a further disposal of the shares within months, including a first offer of the stock to the general public.
Mr Horta-Osorio said: “We have continued to improve the bank and the price [of the shares] is substantially above the price at which the first tranche was sold in September, 75p, and the bank is ready to sell another tranche, but it is absolutely up to the UK Treasury to decide when and how to do it.”
Shares in Lloyds fell on Thursday, closing the trading session down 2.72pc at 81.26p, valuing the bank at £41.2bn. However, even at this share price the stock is well above the Treasury’s break even point of 73.6p.
As part of the continuing turnaround of the lender, Mr Horta-Osorio said work had begun on an updated strategy for the bank that will map out its objectives for the next three years. The Lloyds chief said the plans would be published before the end of the year.
“Over the last three years we have reshaped, strengthened and simplified our business to create a low-risk efficient retail and commercial bank that is focused on our customers and on helping Britain prosper. This progress has seen the Group return to statutory profit in 2013 and despite our legacy issues, further strengthen our capital position,” said Mr Horta-Osorio.
He added: “As a result we expect to apply to the regulator in the second half of the year to restart dividend payments. This will be another important milestone on our journey to rebuild trust and confidence in our Group”
Lloyds will in the summer launch the £1.5bn float its 631-branch TSB subsidiary through a listing on the London market.
However, after spending £1.6bn to create the business as part of a European Commission ordered disposal necessitated by its 2008 bailout the sale is not expected to generate a profit for the bank.
The TSB business, previously known as Project Verde, had originally been expected to be sold to the Co-op Bank, but the troubled lender was eventually forced to pull out of the deal as the extent of its own capital problems became clear.
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