Lloyds whacked with £1 billion bill after tribunal ruling

In a huge financial blow for the bank, Lloyds Banking Group has been ordered to pay approximately £1 billion in tax after losing a legal dispute with HM Revenue & Customs (HMRC) regarding losses tied to its Irish operations following the 2008 financial crisis.

A London tribunal rejected Lloyds’ attempt to challenge HMRC’s stance on tax relief claims linked to billions of euros in Irish property loans. The bank had sought to offset losses incurred from assets it inherited as part of its £12 billion government-backed acquisition of Halifax Bank of Scotland (HBOS) during the financial turmoil. However, HMRC contested the eligibility of these claims, arguing that tax relief considerations played a key role in Lloyds’ decision to exit the Irish market.

Lloyds had disclosed that 90% of its Irish commercial property loan book was impaired, leading to its decision to wind down operations in the country within two years of acquiring HBOS. The tax authority maintained that Lloyds should not be entitled to claim relief on these losses.

Read more: Lloyds Group to shutter over 100 branches as cost cutting expands

The tribunal, which heard arguments nearly two years ago, finally delivered its ruling last month. Lloyds announced on Wednesday that it intends to appeal to the Upper Tribunal, extending the legal battle, which could potentially reach the UK Supreme Court.

“Having reviewed the judgment in detail, we respectfully but fundamentally disagree with the tribunal’s decision and will be appealing,” a spokesperson for the bank said. “The Group is one of the UK’s largest taxpayers, and is, at all times, committed to paying all the tax that it owes.”

During the tribunal hearings, Lloyds argued that the decision to offload the struggling Irish assets was driven by “strong commercial imperatives” rather than tax considerations.

Read more: Lloyds Bank shares plummet on 'worst case scenario' news

Lloyds is expected to record a £955 million cash payment to HMRC in its upcoming half-year report, though its overall profits should remain unaffected due to a tax-asset offset.

HMRC, meanwhile, welcomed the ruling, stating: “We’re pleased the first-tier tribunal agrees with our position to deny claims for cross-border group relief in this case.”

The ruling comes as Lloyds, the UK’s largest domestic lender, navigates other regulatory challenges, including a growing legal issue concerning potentially mis-sold motor finance. The Financial Conduct Authority is conducting a retrospective review of the sector, with some analysts estimating that compensation costs could run into the tens of billions.

Read more: Lloyds CEO backs government intervention in car finance case

With Lloyds preparing to challenge the tribunal’s decision, the case is set to continue in the UK’s higher courts, potentially dragging on for years before a final resolution is reached.

Key legal provisions involved:

1. Corporation Tax Act 2010 (CTA 2010) - Part 5 (Group Relief)
   • This law governs how companies in the same corporate group can transfer tax losses between entities.
   • Cross-border group relief was previously allowed but has been heavily restricted by UK tax law and EU rulings.
2. Finance Act 2006 & 2013 Amendments
   • These acts introduced restrictions on the ability of UK companies to claim tax relief on foreign losses, especially after the Marks & Spencer plc v Halsey (HM Inspector of Taxes) [2005] UKHL 53 case, which allowed limited cross-border relief in certain circumstances.
   • HMRC has taken a strict stance in preventing UK companies from offsetting foreign subsidiary losses against UK taxable profits.
3. European Union Law (Pre-Brexit) - Freedom of Establishment
   • Before Brexit, companies could sometimes rely on EU freedom of establishment principles (Article 49 TFEU) to challenge restrictions on cross-border group relief.
   • However, the UK courts and HMRC have consistently interpreted these rules narrowly, limiting relief for foreign losses.

Why HMRC rejected Lloyds’ tax relief claim

• HMRC argued that Lloyds’ decision to wind down its Irish business was influenced by tax relief considerations rather than pure commercial reasons.
• The First-tier Tribunal Tax Chamber ruled in favour of HMRC, agreeing that Lloyds did not meet the necessary legal requirements for cross-border group relief.

Possible appeal grounds

Lloyds may argue on:

1. Interpretation of CTA 2010 – whether its Irish losses should qualify for tax relief.
2. Commercial Justification vs. Tax Motivation – proving its business decision was not primarily tax-driven.
3. EU Precedents (if relevant) – arguing that past EU cases should still influence UK tax law interpretation.

If the appeal continues, higher courts such as the Upper Tribunal, Court of Appeal, or Supreme Court will decide on the matter.