TAX NEWS - June 2010

UK Bank Levy: Banks hit by fresh £2bn levy

Banks in the UK will be forced to stump up more than £2bn to pay an annual bank levy, George Osborne said in his debut budget on Tuesday.

The balance-sheet tax, to be paid from next January by UK banks and building societies as well as the UK operations of foreign banks, is likely to be the first such levy globally to be implemented.

But in a nod to concerns that a unilateral levy would make the City of London uncompetitive, the chancellor stressed that both France and Germany had pledged to introduce a similar levy on their banks – though full details have not yet been provided.

In a co-ordinated statement, France and Germany (which is set to introduce its own tax from January 2012) said the "specific design" of each levy might vary given different legal and tax strictures, but that each would "take into consideration the need for a level playing field".

Mr Osborne pledged to cut corporate tax rates by a percentage point each year for five years from the current level of 28 per cent. But he said that, for banks, the new levy "far outweighs" any tax benefits extended to the corporate sector as a whole.

The British Bankers' Association said banks were "committed to working with the government to ensure new bank levies balance tax-raising objectives with the need to keep the recovery moving" – a muted response that reflected the City's broader relief that the levy had not been pitched at a more punitive rate.

Nonetheless, foreign banks are likely to explore the extent to which they can minimise their exposure to the levy. Senior bankers within groups including Deutsche Bank, Bank of America Merrill Lynch and Goldman Sachs, indicated they would now look at how much of their balance sheet needed to be based in the UK.

Mr Osborne said the new levy would be calculated on the basis of a bank's total liabilities less both Tier 1, or top quality, capital and insured deposits. So-called repo funding – liquid funds guaranteed with government bonds – would also be exempt.

In a move to encourage banks to lengthen their funding terms, the levy will be charged at half the rate on financing longer than a year.

Documents from the Treasury suggested the levy would raise £1.2bn next year, with the levy pitched at 0.04 per cent of relevant liabilities, rising to 0.07 per cent the following year. This would allow the government to generate more than £2bn in 2012.

Matthew Hodkin, tax partner at Norton Rose, said: "This is another set of rules for banks to get to grips with, only a few months after they were paying a bonus tax. It won't be easy to work out their exposure. It will require another layer of administration."

The City remains worried that the tax will harm London's standing as an international financial centre.

"It isn't a level playing field," said one senior UK banker. "You can set up shop wherever you like – Switzerland, say – and push all your intensive operations through there."

The US has also proposed a balance-sheet levy, but legislation is moving slowly, and Canada and Japan have both said they would oppose such a tax.

Funds raised by the UK levy will go into Treasury coffers, rather than into a hypothecated fund to help finance any future bank rescues, as Germany, for example, is planning.

Mr Osborne said he would separately pursue a globally co-ordinated tax on bank profits or remuneration, as recommended by the International Monetary Fund.