Harry Potter and the bank with the magically vanishing tax bill

IT is better known for financial wizardry such as manipulating interest rates and foreign exchange markets.

But Royal Bank of Scotland has also made £1bn disappear from its tax bill by investing in a host of hit films, from Harry Potter to Charlie And The Chocolate Factory.

Yesterday it emerged that the statebacked giant gained generous tax breaks by exploiting controversial financing deals and is still earning an income from them to this day.

Set up by the Labour government in 1998, these ‘sale and leaseback’ arrangements were established to boost the UK’s film industry.

But they were exploited by wealthy individuals, including footballers and pop stars, as well as blue-chip firms to legally avoid paying tax.

The incentives were finally scrapped in 2007. But between 2003 and 2006 RBS avoided or delayed paying around £1bn in corporation tax, according to an investigation by news agency Bloomberg.

The High Street giant still owns the rights to more than 20 films, with its impressive portfolio also including Troy and Batman Begins.

These schemes allowed film studios to spread their huge distribution costs, and were designed to encourage them to make movies in the UK.

RBS, or another investor, would typically buy a completed film from the studio. They would then receive a regular fixed income by leasing it back to the studio for distribution to cinemas, on DVD, on television or online.

These arrangements – which typically lasted between 15 and 21 years – would give the studio an immediate cash return on the film to invest in other productions. Meanwhile RBS could write off the upfront cost of the film against its profits – slashing the amount of corporation tax due. In theory the schemes simply deferred RBS’s tax bill because the ongoing lease payments from the film studio are taxable. But the bank has not paid corporation tax since 2008.

Secretive companies were set up by RBS to complete these sale and leaseback deals. Patelex IV Productions is listed as the producer of Harry Potter And The Goblet of Fire – starring Daniel Radcliffe ( pictured) – which was released in 2005 by Warner Brothers.

RBS said ‘these leases were compliant with tax law’, adding: ‘We have worked with HMRC to make sure that all our tax obligations in regards to this portfolio have been met.’