New UK bank levy described as ‘pathetic’ by business chief

News - Banking

Written by Ray Clancy

Monday, 25 October 2010 10:21

Bankers in the City of London will be cracking open the champagne as the UK government’s new bank levy is ‘pathetic’, it is claimed.

The UK government plans a £2.5 billion annual tax on banks as part of its drive to ensure financial institutions pay for the potential risks they pose to the economy.

Big banks operating in the UK are in line to pay a larger share of the new industry levy than expected after it emerged that some alterations to the structure of the scheme could raise the overall charge on their balance sheets.

The Treasury released details of a levy that it expected would generate £2.5 billion of revenue a year by 2012. The tax, which starts in 2011, will apply to the global balance sheets of British banks and the UK operations of foreign banks. However, some technical changes to the draft legislation mean large banks could be hit harder than small and medium institutions.

According to TUC General Secretary Brendan Barber the levy is not tough enough. ‘This is a pathetically small amount to demand from the banks. Ministers have come up with the smallest number that they think they can get away with, even though the banks are carrying forward £19 billion of tax losses to offset against future tax bills, losses that have been bailed out by the taxpayer,’ he said.

‘Those who caused the recession will be cracking open the champagne today, while the full extent of the attacks on the living standards of poor and middle income Britain are starting to sink in. With government MPs cheering cuts in support for some of the most vulnerable in society, it looks like we have gone back to the 1980s greed is good culture,’ he added.

However, the British Banking Association said that banks are committed to playing their part in restoring the UK economy and that includes helping to meet the greater demands on the Exchequer.

‘The banking industry paid more than £26 billion in taxes last year and the bank levy will increase this figure. We will work with the Treasury to ensure the final levy also meets the aim of maintaining the UK’s position as the world's financial centre while generating additional tax revenues,’ a spokesman said.

As the levy applies not only to UK banks but also to the more than 200 overseas banks operating in the country, questions are being raised about the UK proposing to apply tax to a global balance sheet. The Treasury’s statement is largely silent on how this levy would interact with taxation in other countries.

Until this is clearer, some banks could be taxed multiple times by multiple jurisdictions on the same activities. There is also no international consensus on how banking activities should be taxed.

The charge will hit banks and building societies with liabilities over £20 billon. The final charge is likely to be between 0.05 and 0.1% of a bank’s global balance sheets. Stable funding sources, such as retail deposits, will either be exempt or will qualify for a discount in an effort to encourage banks to cut risk. Institutions that generate less than 50% of revenue from banking activities will not be affected.

The Treasury is working with other governments to resolve the issue of double taxation but some lawyers warned that it might be hard-pushed to reach an agreement. Lawyers warned that proposals to exclude certain liabilities from the levy could mean big UK banks such as Barclays, HSBC and Royal Bank of Scotland, end up paying more.