Darling Forces RBS to Give Up U.K. Tax Relief on Record Losses

By Mark Deen

Feb. 27 (Bloomberg) -- Chancellor of the Exchequer Alistair Darling forced Royal Bank of Scotland Group Plc to give up the right to claim its current losses against future taxes in the U.K., a potential boost to the Treasury’s finances.

In exchange for guaranteeing 325 billion pounds ($462 billion) of RBS assets, the Treasury required the bank to forgo unspecified allowances that normally could be used to reduce its payments and also the right to count losses against taxes owed.

The decision will help Prime Minister Gordon Brown confront the biggest budget deficits since modern records began in 1970 as the recession dries up revenue to the Treasury. RBS paid 16 billion pounds of corporate tax from 1998 to 2007, about 80 percent of the cost of its government-funded recapitalization.

“This is a sign of things to come,” said Peter Spencer, a former Treasury official now advising Ernst & Young. “The government has got to spend now to keep the wolf from the door, but we’re all trying to figure out when the debt is going to have be paid off.”

Lloyds Banking Group Plc also is talking to the Treasury about joining the asset protection plan tapped by RBS yesterday. An announcement detailing its participation may come as early as today. Lloyds said the terms it negotiates with ministers may not be the same as the RBS program.

Record Loss

Yesterday, RBS reported a 24.1 billion-pound loss for 2008, the biggest in U.K. corporate history and surpassing the 22 billion pounds Vodafone Group Plc lost in 2006. In ordinary times, that loss could be used to reduce taxes in future years.

RBS “agreed for a number of years not to claim certain U.K. tax losses and allowances, meaning that when they do return to profitability, they will not be able to benefit from the losses accrued in the intervening period,” Darling said yesterday.

“That will soak up cash from the bank and increase the Treasury’s tax yield,” said George Bull, a tax accountant at Baker Tilly in London. “It will also reduce the amounts available for lending or shareholder dividends.”

Britain’s five biggest banks -- RBS, Lloyds, HSBC Holdings Plc, Barclays Plc and Standard Chartered Plc -- set aside about 5.3 billion pounds to pay U.K. corporation tax in 2007, according to Bloomberg calculations based on their annual reports. That’s about 10th of the 46 billion pounds collected.

Wider Deficits

While Darling is ladling out money now, he’s also working to shore up the public finances in coming years when he assumes the economy will rebound. In the first 10 months of the fiscal year, the deficit widened to 67.2 billion pounds, the most since records began in 1993, from 23.1 billion pounds a year earlier.

“There’s no easy way out for the government finances,” said David Page, an economist at Investec Securities. “Weakness in financial sector profits over the next year or so means the outlook for corporation tax receipts is bleak.”

Voters are increasingly upset with the government for allowing banks to rack up bad debts and want Brown to rein both risky behavior and the bonuses of the executives responsible. Brown’s Labour Party trailed the Conservative opposition by 20 points in an Ipsos-Mori Ltd. survey earlier this month, the most since before the first bailout in October.

“There’s a feeling of ‘how much longer can this go one for?’” said Andrew Hawkins, a pollster at ComRes Ltd. in London. “There’s real public anger.”

Darling’s budget plan calls for a fiscal stimulus of about 20 billion pounds including spending increases and tax cuts for the next two years. Following that, he expects to increases revenue for the following three years.

The Institute for Fiscal Studies, a public finances consultant that includes the Treasury and Bank of England among its clients, says the deficit is manageable so long as the government takes credible steps to close it.

“Better to do too much that may not be necessary than be seen to do nothing when further effort is required,” said Gemma Tetlow, an IFS economist. Tightening could “subsequently be reversed if it isn’t needed.”

To contact the reporters on this story: Mark Deen in London at markdeen@bloomberg.net