The levy will apply to:
- the consolidated balance sheet of UK banking groups and building societies;
- the aggregated subsidiary and branch balance sheets of foreign banks and banking groups operating in the UK; and
- the balance sheets of UK banks in non-banking groups.
These entities will only be liable for the levy where their relevant aggregate liabilities (see below), amount to £20billion or more. The levy will be based on total liabilities (ie both short and long term liabilities) excluding:
- Tier 1 capital;
- insured retail deposits (i.e. those covered by the Financial Services Compensation Scheme);
- repos secured on sovereign debt; and
- policyholder liabilities of retail insurance businesses within banking groups.
For UK branches of foreign banks, the Government proposes to use the principles applied to the capital attribution methodology used for corporation tax purposes in determining branch liabilities and Tier 1 capital.
It is proposed that derivative liabilities will only be taken into account where they are net derivative liability positions.
It is proposed that the levy will be set at 0.07% which is expected to raise over £2billion annually. However, there will be a lower rate of 0.04% in 2011. There will also be a reduced rate for longer-maturity wholesale funding (ie greater than one year remaining to maturity) to be set at 0.02% rising to 0.035% (half the main rate).
There will be anti-avoidance provisions to prevent avoidance of the levy.
The levy will not be deductible for corporation tax.
The Government will consult with industry over the summer, including over the technical details of the levy design. Final details of the levy will be published later this year following this consultation.
The Government has also announced that it will explore the costs and benefits of a Financial Activities Tax, working with international partners to secure agreement.
The Chancellor announced that the Government will introduce a bank levy from 1 January 2011.
The introduction of a bank levy has been expected, given the Chancellor's comments both before and since the General Election. The bank levy will provide the Treasury with a useful source of additional revenue. The £2bn annual revenues from the levy, once the full rate applies, looks at the low end of our expectations; but this may be due to the Treasury taking account of expected behavioural changes.
The levy will cost larger banking groups several hundred million pounds pa, at full rates. The levy is just one of several incremental costs imposed on banking groups; Basel III proposals and other regulatory changes will increase capital requirements and liquidity holdings, for example. All these costs will need to be borne between shareholders, employees and customers.
France and Germany have also announced the introduction of a bank levy, although details are yet to be provided. France and Germany intend the proceeds of the levy to be set aside as a separate fund to help manage any future financial crisis; whereas the UK intends any funds raised to be treated in the same way as other tax receipts.
Last year the G20 asked the International Monetary Fund (IMF) to investigate potential new bank taxes. The IMF published an interim report 'A Fair and Substantial Contribution by the Financial Sector' in April 2010 which discusses both a Financial Stability Contribution (based on bank balance sheets) and a Financial Activities Tax (based on the sum of profits and remuneration). The G20 will consider the possible co-ordinated introduction of bank taxes in Toronto on 24 June. A number of G20 nations, including Canada, Brazil, China and India oppose such taxes, mostly due to the belief that improved regulation (or contingent capital) is the right way to tackle systemic risk. The USA has announced a similar bank levy, initially proposed to be at a rate of 0.15% of liabilities on large financial groups, in order to repay taxpayers for the cost of the TARP funds.
The UK risks losing competitiveness in this vital market, by introducing a tax without a co-ordinated global response. It would be interesting to understand why the Government believes introducing the bank levy without international consensus is appropriate, but it is waiting for such consensus before introducing a Financial Activities Tax.
Smaller banks and non-bank lenders will have a potential competitive advantage. The IMF paper recommends a wide base (potentially including insurers). It should be noted that it was the largely unregulated shadow banking sector that has been identified as a key contributor of the recent financial crisis.
In a similar way to the uncertainty which first existed when the Bank Payroll Tax was introduced in PBR 2009, there may be questions over the definition of a bank or banking group. We would welcome early clarification of this so the scope of the levy is not inadvertently wide.
The Treasury's claim that the levy will 'encourage banks to move to less risky funding profiles' seems a bold position given a maximum rate of 0.07%. Banks have already started the process of improving their liquidity profiles in light of the recent problems. Commercial and regulatory pressures are likely to be much more effective here than the differential tax rates.
There appears to be a significant risk of double taxation for international groups. A UK headquartered bank will be liable to the UK bank levy on its global liabilities, but the bank also appears liable to the French and German bank levies on the liabilities on their French and German balance sheets. This double taxation issue, together with a better understanding of which liabilities are included in the calculation, the treatment of off-balance sheet items, and how often the calculation will need to be performed are some of the issues which will need to be addressed in the consultation this summer.