Banks bore the brunt of George Osborne’s revenue-raising initiatives in a budget that was otherwise welcomed by business leaders for bolstering the oil and gas industry and pushing on with cutting corporation tax to one of the lowest levels in the G20.
HSBC was expected to be hit hardest by the chancellor’s unexpectedly sharp increase in the bank levy, which he introduced in his emergency budget at the start of the parliament in 2010.
The rise was part of a package of measures intended to bring in £5.3bn of revenue from banks over the next five years, with a further £9bn from the sale of more Lloyds Banking Group shares.
The surprise 25% increase in the levy on bank balance sheets was announced alongside moves to prevent banks claiming tax relief on compensation for customers to whom they missold products such as payment protection insurance, a scandal that has cost the industry more than £20bn.
Bill Dodwell, head of tax policy at Deloitte, said barring banks from deducting the cost of compensation would cost them more than £200m a year.
Andrew Hubbard, tax partner at Baker Tilly, said: “The banks have really been clobbered in this year’s budget.”
Chris Sanger, head of tax policy at accountants EY, said: “In aggregate, the chancellor’s budget was ‘mostly harmless’ other than for banks, who once again bore the brunt of the revenue-raising.”
Taken alongside measures in December’s autumn statement to restrict the way banks can use past losses to reduce their tax bills, Wayne Weaver, Deloitte’s UK banking tax leader, said Osborne was expecting banks to bring in an extra £9bn of tax revenue by 2020.
“Approximately 30 banks are subject to the levy, but roughly 70% of it is paid by the large UK banks. One has to remember that the levy isn’t a tax on bank profits, but on the size of the balance sheet, so must be paid even when a bank doesn’t make any profit,” said Weaver.
Bank shares came off their highs although they still ended the day in positive territory even as Tom Aston, partner at accountants KMPG, described the levy increase as swingeing. It is the eighth rise since the levy was introduced – but the other increases have been necessary to try to achieve the chancellor’s targeted £2.9bn annual tax take at a time when banks have been shrinking their balance sheets. The latest increase brings in another £900m a year. It raised just £1.6bn in its first year and £2.2bn the year after – missing the target.
The chancellor also turned to the banking sector to claim he could reduce the UK’s national debt by selling off another £9bn of shares in Lloyds Banking Group in the next 12 months, possibly by selling shares directly to the public. If the share sale is achieved, the taxpayer stake would be cut to 7%. Currently below 23%, it has been reduced by a series of share sales to bring it down from 43% at the time of the taxpayer bailouts in 2008.
The government is also to sell off £13bn of mortgages that were taken over from Northern Rock, in its Granite securitisation vehicle. That came alongside the announcement of a significant restructuring of the UK Asset Resolution operation that houses the bailed-out parts of Northern Rock and Bradford & Bingley.
Osborne said: “The banks got support going into the crisis; now they must support the whole country as we recover from the crisis.”
Simon Walker, director general of the Institute of Directors, said the chancellor was right to resist the temptation to “binge” on a windfall from the share sales. “By using it to pay down our national debt, George Osborne has shown commendable discipline,” he said.
The British Bankers’ Association hit out against the levy, arguing that banks already paid £40bn to the exchequer each year. “The bank levy imposes a significant cost on banking businesses in the UK, which is making many banks move work and jobs to other parts of the world, and is deterring international banks from investing in the UK,” said Anthony Browne, chief executive of the BBA.
John Cridland, director general of the CBI, the employers’ body, also expressed concern about the hit to the banking sector, which he said could have a negative impact on investment and lending. But Cridland otherwise welcomed the budget’s tax measures helping the oil and gas industry, which supports 450,000 jobs, and cutting corporation tax, as expected, to 20% next month.
Cridland said the corporation tax cut “is a meaningful step in making the UK the most competitive tax regime in the G20 and will help to attract investment”.
But the hit on the banking sector did not go far enough for those campaigning for a tax on the industry. David Hillman, spokesperson for the Robin Hood Tax campaign, said: “George Osborne is right to ask the financial sector to pay more – but the bank levy increase falls short of the mark.”
There were also measures to restrict the way banks are able to claim VAT costs on non-UK branches. “This change in HMRC’s current practice hits banks and insurance companies harder than almost any other sector because they don’t charge VAT to their customers, so can’t recover any VAT incurred,” said Jeff Soar, head of tax for financial services at accountants EY.
Mortgage employees face job moves
Up to 1,800 jobs could be affected by a decision by the taxpayer-owned body that owns parts of Northern Rock and Bradford & Bingley to sell off its Yorkshire-based mortgage process business.
The 1,800 employees involved in handling mortgages for 450,000 customers of UK Asset Resolution – which employs 2,000 people in total – would be expected to move to the buyer of the business.
The move by UKAR was announced alongside a plan to sell off the Granite securitisation arm, which packaged up Northern Rock mortgages and sold them to investors to fund the bank before it was nationalised in 2008.
Granite has £13bn of mortgages, but £9bn of liabilities, which means it could be sold to a private equity buyer for around £4bn. A sale, which could come in the next 12 months, would leave UKAR with a £40bn mortgage book and 200 employees.
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