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Page last updated at 20:05 GMT, Monday, 21 September 2009 21:05 UK
Tax inquiry into Lloyds off-shore

By John Sweeney
BBC Panorama

John Sweeney in Jersey

Lloyds Banking Group is being investigated by British tax officials over allegations that wealthy clients are being encouraged to avoid UK taxes by channelling money through China, a BBC Panorama investigation reveals.

The advice from an employee at the Jersey branch of the bank bailed out by taxpayers was secretly filmed for the BBC by a man posing as a client with £4m to invest.

In response, Lloyds denied any wrongdoing in its offshore practices and said it has suspended the employee in question pending an internal investigation.

During the secret filming, the employee at the branch of Lloyds TSB Offshore told the undercover customer that income earned on deposits made in the tax haven is paid to clients via Hong Kong to "get round" the European Savings Tax Directive.

£17 billion

If that investment or interest income was paid directly from Jersey, then the recipient would be liable to pay the EU savings tax.

Lloyds was rescued last year with a £17bn bailout by the UK government.

The undercover customer told the Lloyds employee that he wanted to avoid paying tax and asked about reporting income to Inland Revenue.

John Sweeney
Panorama's John Sweeney investigates off-shore banking

The banker replied: "It's of no interest to us whether you tell the tax man or not. It's not our business."

When told of the practice, Dave Hartnett, permanent secretary at HMRC, said: "That's an incredibly irresponsible thing for him to have said. We might interpret that to mean he was so reckless that he was giving his client a signal that he didn't have to make a return of income. Were we to find that happening we would take a very dim view of it."

Mr Hartnett was not told in advance of the interview with Panorama that the bank in question was Lloyds, but details of the secret filming have since been passed to his department, prompting the investigation.

Other publicly funded banks are also continuing to do business off-shore in traditional tax havens.

Among them is Northern Rock - which was bailed out by the taxpayer with £27bn at the start of the banking crisis in 2008.

It has an offshore subsidiary in Guernsey and has seen deposits almost double to £2bn since the bank was nationalised.

A banker from Northern Rock in Guernsey told Panorama's undercover customer that he could avoid the EU tax rules by opening an account in the name of a non-trading company. The Northern Rock banker said the customer should inform the Inland Revenue.

But the bank itself keeps the details secret from the taxman.

In a statement to Panorama, Northern Rock said: "Northern Rock plc refutes any suggestions that its subsidiary is behaving inappropriately and would reiterate that Northern Rock Guernsey informs and reminds all account holders that they are responsible for declaring the interest earned from their savings to their relevant tax authority."

'Paper transaction'

At the Lloyds branch on Jersey, the employee discussed investing in the bank's High Income Fund with the undercover Panorama customer.

"The income made from the fund would go to Hong Kong and then Hong Kong would send it out to all the clients, and that's how we get round it."

The customer asked if it was "only a paper transaction" and was told that it was designed solely to "get round the EU tax".

Eric Daniels Lloyds Chief Executive

With the income officially coming from Hong Kong, "it falls outside the scope", the employee said.

He also admitted that he and his colleagues "brainstorm" ways to get around the tax rules.

HMRC's Mr Hartnett, said: "Brainstorming in the context suggests to me some complex arrangement for tax avoidance. Or, worse still, potentially facilitating tax evasion. Frankly we simply cannot tolerate that sort of behaviour."

Lloyds High Income Fund has assets of almost £300m. The bank has 10 other funds which also pay income using an agent in Hong Kong.

In response to Panorama, Lloyds said: "Any advice we offer customers is made within the context of the robust anti money-laundering systems and processes we have in place. These processes are designed to ensure that colleagues are able to identify and report any suspicious activity on the part of our customers."

Having received substantial taxpayer support, banks in particular, must convince us that they are playing by the rules and not encouraging, or engaging in, tax avoidance
Treasury spokesman

They continued: "We have been provided with information by Panorama which could suggest serious misconduct by a member of staff in one of our Jersey offices. We take these allegations by Panorama very seriously and a full and comprehensive investigation into this matter is already underway. The member of staff has been suspended pending the outcome of our investigation. If the investigation concludes that serious misconduct has occurred, then the company will take the appropriate disciplinary action."

Lloyds has 130 companies in tax havens, this despite an announced crackdown on tax havens made by Prime Minister Gordon Brown at the London G20 summit.

A treasury spokesman said: "The government is clear that tax avoidance or evasion is totally unacceptable, whether it is undertaken by businesses or individuals.

"At a time when many people are facing difficulties from the global downturn, it is vital that everyone pays their fair share of tax. Having received substantial taxpayer support, banks in particular, must convince us that they are playing by the rules and not encouraging, or engaging in, tax avoidance."

Panorama: Banks Behaving Badly?, BBC One, Monday 21 September at 2030BST.



SEE ALSO
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Tax Me If You Can
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