U.K. Rejects Parliamentary Watchdog’s Tax Advice on Northern Rock

Trust Bloomberg Tax for the international news and analysis to navigate the complex tax treaty networks and global business regulations.

By Ben Stupples

The U.K. Treasury has rejected recommendations from Parliament’s spending watchdog that it should discount possible gains derived from tax avoidance in bids over the sale of state assets.

The British government “disagrees” with a recommendation from the Public Accounts Committee that it should have discounted bids from companies based outside the U.K. for the 13 billion pound ($16.2 billion) sale of the assets of state-owned Northern Rock Plc in November 2015, according to February 2017 minutes for Her Majesty’s Treasury.

In a November report on the sale of former Northern Rock assets, the committee said U.K. companies faced paying more tax in the sale.

The PAC also said the tax foreign companies avoided, due to being domiciled outside the U.K., should be discounted from future public asset sales.

“When an asset is sold, HM Treasury should require departments as far as possible to discount gains from tax avoidance that may be factored into bids. HM Treasury should also produce unambiguous guidance, for both selling departments and potential bidders on if, and how, tax will be taken into consideration as part of a sale or a contract award,” the PAC said in its report.

Yet discounting the bids of foreign companies based on the tax they avoid would “risk undermining” the bidding process and “undermine the potential for securing value” from any sale of public assets, the Treasury said in the Feb. 6 summary document.

“Finally, to discriminate against a company based on its tax jurisdiction would risk the government being exposed to legal challenge,” it added.

Cerberus Capital

The government’s sale of 270,00 mortgages and loans originally belonging to Northern Rock was its largest-ever disposal of financial assets. In November 2015, U.S. private equity firm Cerberus Capital Management LP agreed to buy the assets, state-owned since the 2008 financial crisis, beating out U.S. investment banks Goldman Sachs Group Inc. and JPMorgan Chase & Co.

The New York-based firm won a six-month bidding process for the home loans. Proceeds of the sale, which helped repay 5.5 billion pounds to the state, included a premium of about 280 million pounds.

In the decade leading up to the 2007 bank run, Northern Rock grew rapidly to become Britain’s fifth-largest mortgage lender, with assets in excess of 100 billion pounds, according to the U.K. Treasury. The bank relied on wholesale funding and securitization for its expansion, which left it exposed when markets seized up during the financial crisis and prompted the British government to take it over.

Cayman Islands

In the Nov. 9 report, the PAC highlighted Cerberus Capital’s “complicated” company structure, with subsidiaries in the Cayman Islands and the Netherlands. According to the report, the company said it would have paid more in tax, but also less “upfront,” if it had used a company domiciled in the U.K.

For the sale of public assets, HM Treasury told the committee that it doesn’t consider the tax domicile of potential bidders due to fears of a subsequent legal challenge. The lack of information collected for the potential tax impact on the sale may have disadvantaged U.K.-based companies, the PAC said.

Cerberus Capital’s press office did not respond to a Feb. 6 e-mailed request for comment.

In a Feb. 6 e-mail to Bloomberg BNA, Tim Bowden, a PAC spokesman, said the committee will look at the Treasury’s latest minutes but declined to add further comment.

To contact the reporter on this story: Ben Stupples in London at bstupples@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.

Request International Tax