HMRC in line for £1bn windfall from Lehman Brothers collapse

UK supreme court rules administrators winding up bank must pay tax on assets

More than a decade after the collapse of Lehman Brothers sparked the global financial crisis, the British taxman may be in line for a £1bn windfall.

The UK supreme court ruled on Wednesday that administrators overseeing the winding up of the investment bank must pay tax on more than £5bn in assets that have been left over from the collapse.

A standard tax rate of 20% translates to more than £1bn for HM Revenue and Customs (HMRC) coffers.

An HMRC spokesperson said: “We welcome the supreme court ruling that confirms our analysis and means over £5bn is in scope of withholding tax rules. This is another example of HMRC seeking robust challenges to ensure that money is available for the UK’s vital public services.”

Lehman Brothers, an emblem of the Wall Street investment banking boom, went bankrupt on 14 September 2008 when it ran out of cash to pay its bills after banks stopped lending money to each other. The subsequent panic sparked the worst global recession since before the second world war.

However, while Lehman Brothers was insolvent in cash terms, its balance sheet still held valuable assets. As the panic subsided, the value of those assets recovered as well, leaving a surplus of £7bn after paying former Lehman employees, creditors and suppliers what they were owed. In total, administrators have recovered more than £40bn from Lehman.

The administration has been particularly profitable for hedge funds, including King Street Capital Management, Elliott Advisors and CarVal Investors. They bought debt owed by Lehman to other parties at the height of the crisis at bargain prices.

Some of the debt was bought for prices of about 20p for every pound of face value. With creditors expected to receive about 140p for every pound of debt, the boldest of the investors have made staggering profits from the administration.

Fees for the decade of work in winding up the bank, including by the administrators PwC and legal advice from the likes of Linklaters, have reached almost £1bn as well.

Sign up to the daily Business Today email or follow Guardian Business on Twitter at @BusinessDesk

About £5bn of the surplus took the form of statutory interest, sparking a legal battle between administrators and HMRC over whether or not they were liable for tax. HMRC successfully appealed against an initial high court ruling in favour of the administrators.

The supreme court described the surplus from the administration as “unprecedented”. In the judgment, Lord Briggs, one of the 12 judges who serve on Britain’s highest court, wrote: “It is no mere irony that [Lehman Brothers’] unsecured debt has, during that last 10 years, turned out to be a very satisfactory long-term investment.”

However, the money is not quite secure for HMRC. Some of the hedge fund creditors are understood to have launched claims to stop the payments to HMRC under treaties designed to prevent income from being taxed in two countries.

Russell Downs, a partner for PwC who led the Lehman administration, said: “We are pleased that the supreme court has handed down this important decision on a technical tax issue. It provides the clarification needed in the rare circumstances where insolvency officeholders pay interest to creditors out of an estate’s surplus – having paid creditors in full – as has been achieved in the case of LBIE [Lehman Brothers International Europe], and other UK Lehman companies, by PwC.”

Contributor

Jasper Jolly

The GuardianTramp

Related Content

Article image
Lehman Brothers collapse: where are the key figures now?
Ten years ago this weekend the investment bank’s bankruptcy caused panic in US and UK

Sean Farrell

11, Sep, 2018 @5:00 AM

Article image
Lehman collapse: what has happened to the markets since?
The effect on the FTSE 100 through to pensions, house prices and savers

Phillip Inman

12, Sep, 2018 @2:03 PM

Article image
Lehman Brothers went bust 10 years ago – can it happen again? | Larry Elliott
US subprimes set off the last crisis. We look at the possible causes of another crash

Larry Elliott

11, Sep, 2018 @2:56 PM

Article image
Lehman Brothers collapse: five years on, we're still feeling the shockwaves
Lehman's trillion-dollar bankruptcy shook the foundations of the global economy. Larry Elliott retraces the reverberations

Larry Elliott, economics editor

13, Sep, 2013 @5:07 PM

Article image
Lehman Brothers employee: 'Collapse was a huge shock'
Former employee at bank's London office gives her view of bankruptcy five years ago – and how she reinvented herself

Jennifer Rankin

13, Sep, 2013 @7:32 PM

Article image
Lehman Brothers collapse, five years on: 'We had almost no control'

In the first part of a major series recalling the defining moment of the credit crunch, leading figures recall the shattering impact of the bank's collapse on the British financial sector

Larry Elliott and Jill Treanor

13, Sep, 2013 @6:00 AM

Article image
£1.1bn in fees, 3.1m hours, 14 years: the UK cost of winding up Lehman Brothers
PwC, administrator of Lehman’s London arm since bank’s failure in 2008, secures three more years to finish process

Kalyeena Makortoff Banking correspondent

28, Dec, 2022 @6:00 AM

Article image
Lehman Brothers' former CEO blames bad regulations for bank's collapse
Dick Fuld defended the bank’s culture, pointing the finger instead at government failings and hedge funds aggressively short-selling its stock

Simon Bowers

28, May, 2015 @7:39 PM

Article image
Labour condemns 'sickening' Lehman Brothers reunion party
Shadow chancellor says party to mark 10 years since firm went bust will disgust people

Andrew Sparrow

20, Aug, 2018 @11:56 AM

Article image
Greece is no Lehman Brothers | Raoul Ruparel

Raoul Ruparel: Politicians are using misguided comparisons in their efforts to ignore Europe's sick, undercapitalised banking system

Raoul Ruparel

28, Jun, 2011 @6:00 AM