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UK financial sector pushes back against punitive tax policy

09 September 2015

Matthew Gilleard

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Financial sector backlash against UK tax changes continues to grow as revenue figures become clearer.

The changes, announced by George Osborne, Chancellor of the Exchequer, in July’s Summer Budget, include a new 8% surcharge that will be applied, from the beginning of 2016, to bank profits above £25 million ($38 million), while the UK’s bank levy will be gradually phased out.

The latest wave of opposition to the new measure comes after an EY report, released Monday [September 7], warned that the tax take from the new surcharge could be double the amount forecasted by Treasury.

Anthony Browne, chief executive of the British Bankers Association (BBA), said many of his members fear the introduction of the bank corporation tax surcharge will affect the competitiveness of the UK as a centre for banking.

"It’s vital that the UK is seen as a stable and welcoming place to do business," he said.

"Greater certainty over when the bank levy and the surcharge might cease to be in force is needed," added Browne.

According to Osborne’s Budget speech, the bank levy will be reduced gradually over the next six years.

Originally introduced in 2011 as a response to the financial crisis, the levy on bank balance sheets has been used as a recurrent budgetary tool, rising nine times since its inception.

When Osborne announced in July that the bank levy had achieved its aim of raising revenue and increasing stability and that "now it risks doing harm", financial institutions briefly rejoiced, only to learn moments later of the plans for a new profits surcharge.

Government forecasts show that bank tax revenues will reach £4.3 billion in 2017-2018 as the new surcharge hits, falling to £3.5 billion by 2020-2021 as the bank levy disappears.

But the opposition Labour party has been quick to criticise the government’s approach to taxing the financial sector.

"The new policy signals a worrying change in the government’s approach towards bank taxation," said Alison McGovern, shadow City Minister, in an article for City AM.

McGovern said the government’s policy "risks stifling competition and acting as a restraint on sensible lending".

"The planned scaling down of the [bank] levy and its replacement with a new 8% surcharge on bank profits will act as a tax rise for small challenger banks and building societies, who pose less risk to our economy, while the big international banks get a much better deal."

Smaller banks and challenger banks harbour concerns that the surcharge will hinder their expansion plans.

"The unfairness of this approach is only dwarfed by its irresponsibility," said McGovern.

Chris Leslie, shadow chancellor, also weighed in, saying the proposals "could harm competition and diversity in the sector – the very things he once briefly claimed to champion".

Andrew Tyrie, Conservative MP and chairman of the House of Commons Treasury Select Committee, has previously warned of "unintended consequences", telling the FT that: "anything which reduces banking competition reduces the scope for new entrants into a market that is not widely held to be sufficiently competitive and would not be in the interests of consumers".

Finding clarity amid mixed messages

Getting this policy right is important because global mobility means institutions may take their business elsewhere if the measures are considered overbearing.

Standard Chartered and HSBC have both made loud noises about leaving the UK as a result of financial sector tax policy changes implemented by Osborne in recent years. Both banks have said they will make a decision about their future headquarters by the end of this year, but the removal of the bank levy, replaced with a repositioned profits surcharge, appears to be aimed – at least in part – at appeasing the likes of HSBC.

"The reform and reduction in the bank levy will be welcomed particularly by those banks with large overseas operations," said Matthew Barling, banking tax partner at PwC, in response to the Chancellor’s Summer Budget. "However, the long term phased nature of the reform coupled with the new profits-based 8% corporation tax surcharge means the overall tax burden on the banking sector will go up during this parliament. This sends very much a mixed message in terms of competitiveness of the UK as a place for carrying on banking business."

The move already seems to have worked on HSBC. As part of a rebranding, undertaken in line with incoming regulations requiring lenders to segregate their retail operations, the bank this week announced that from 2018 its ring-fenced bank will be called HSBC UK.

"It soon became obvious that everyone preferred a name that maintains a strong connection to HSBC, and a clear commitment to the UK," said a memo from Stuart Gulliver, HSBC chief executive.

International Correspondents