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UK Takes a Bold Step by Introducing a Banking Levy

26 Jul 2010

A bank levy was announced in the UK Emergency Budget and will be introduced from 1 January 2011. The levy will be based on a balance sheet approach and will apply to all major banks and building societies in the UK regardless of nationality. Taxand UK reviews the bold move made by the UK Coalition Government.

Given prevailing UK public opinion and the imposition of the Bank Payroll Tax in December 2009, further levies on large banks were widely expected.

The G20 countries recently rejected a universal banking levy, instead opting for a soft agreement on opt-in bank levies. This creates a very uneven playing field whereby banks are likely to be levied in some countries and not in others. Some banks could be forced to review operational structures, for example relocation of head and branch offices from one jurisdiction to another.

The bank levy is expected to raise ?2 billion per annum.

The exact details are unknown at this stage, and the Government plans to consult over the summer. In summary:

  • The levy will apply to institutions and groups with aggregate liabilities over ?20 billion.
  • It is proposed that the levy will be set at 0.07% of total liabilities. However, there will be a lower rate of 0.04% in 2011. There will also be a reduced rate for longer-maturity wholesale funding (i.e. greater than one year remaining to maturity) to be set at 0.02% rising to 0.035%.
  • The levy will not be deductible for corporation tax purposes.
  • Anti-avoidance measures will apply.

The significant matter to be resolved is what the definition of a "bank" is for the purposes of the levy. The definition of a "bank" for the purposes of the Bank Payroll Tax legislation took many months to resolve and this led to significant uncertainty.

A joint announcement was made with the governments of France and Germany, which also agreed to introduce bank levies based on banks' balance sheets. France will present the details of its bank tax in the coming Budget. Germany announced a framework for a national bank levy at the end of March and will present draft legislation in the Cabinet in summer. These levies are intended to be similar, although in practice the final form in the respective territories is likely to be different.

The failure of the G20 to agree on a global levy leaves the Chancellor, George Osborne, in an awkward position. Having made a pre-election pledge to introduce a levy without waiting first for international consensus, he is in a situation where other countries may be tempted to compete with each other to offer attractive tax regimes for large banks. Indeed, the corporation tax rate was cut to 24% in the same Budget announcement in a phased reduction from 2011 to 2014 in order to improve UK competitiveness. This tax cut will help to offset the impact of the bank levy.

Taxand's Take

Many analysts were expected significantly more punitive fiscal measures against large banks, and indeed the implementation of the Basel III requirements for capital and liquidity and other regulatory reforms are likely to have a much bigger impact on banks going forward.

Nonetheless, the bank levy will create a new ongoing administrative burden - not only for the large banks which need to pay it, but also for smaller institutions whose liabilities fall close to the ?20 billion starting point.

In introducing the bank levy the UK has made the first move on the international stage. With the lack of a G20 agreement on a global levy, the government now needs to maintain the competitiveness of London as a financial centre and prevent a flight from the UK.

What is needed is certainty - particularly on the definition of a "bank" - therefore a rapid consultation process is encouraged.

Your Taxand contact for further queries is:
Ian Fleming
T. +44 (0)20 7663 0425

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