Major lenders will be the largest beneficiaries of shock changes to the bank levy announced by George Osborne following sustained lobbying by the industry.
But the chancellor’s move to scale back the levy, which has raised £8bn since 2010, came alongside a new 8% surcharge on bank profits that experts said would spread the tax burden more widely across the sector.
Shares in HSBC and Standard Chartered, which had sunk this week on concerns about the situation in China, were lifted off their lows. But smaller banks fell following the surprise announcement because they will be hit by an industry tax for the first time.
Virgin Money fell 9%, while Aldermore was off 15% and Shawbrook sunk 10% as investors digested the implications of the new surcharge, which will be introduced from the start of next year for banks that make annual profits of more than £25m.
Dana Ward, head of financial services tax at accounting firm Grant Thornton, said: “The Chancellor’s announcement on the reduction of the bank levy will no doubt be welcomed by major banks, including HSBC, and UK business generally.”
The change to the bank levy follows a series of complaints by the major banks, particularly those such as HSBC and Standard Chartered, which are based in London but do much of their business overseas. HSBC’s chief executive, Stuart Gulliver, said in May the £700m it paid towards the bank levy was impeding his efforts to bolster returns to shareholders. His remarks were regarded as particularly pointed given the bank’s ongoing review into whether to remain headquartered in the UK.
The levy has been based on bank’s global balance sheets, but will be focused only on their UK operations from 2021. Responding to complaints from banks that the levy has been hiked too often and without warning, Osborne set out a timetable of reductions from 0.21% to 0.18% from January 2016 and 0.17% from January 2017, before reaching 0.10% from January 2021.
Wayne Weaver, banking tax partner at accountant Deloitte, said: “Since its introduction, the bank levy has raised over £8bn for the exchequer and is now expected to raise nearly £4bn each year … [The changes] will benefit the UK banks who currently bear the lion’s share of the levy.”
Osborne told MPs: “Our bank levy was introduced to raise revenue and increase the stability of balance sheets, and it’s worked – but now it risks doing harm unless we change it. So I will, over the next six years, gradually reduce the bank levy rate – and after that make sure it no longer applies to worldwide balance sheets.
“But to maintain a fair contribution from the banks, I will introduce a new 8% surcharge on bank profits from the 1st January next year. By getting this balance right, it means we’ll actually raise more from the banks this parliament, but at the same time make our country a more competitive place to do business.”
He also issued a new remit for the Bank of England’s financial policy committee - set up by the coalition government to look for weaknesses in the financial sector - to take account of “the importance of productive investment, innovation and competition in finance” when making decisions.
Dominic Hook, national officer for finance at the Unite trade union, was critical of the relaxation of the levy. “This sends all the wrong signals to the banking industry,” he said. Tom Aston, financial services partner at accountants KPMG, said that while global banks with relatively small proportions of their balance sheets in the UK will benefit, the picture was more mixed for other banks.
The banking industry also kept up its calls for a review of the taxation of the sector, which is forecast to bring in around £1bn in corporation tax over the next six years. This followed a government move last year to restrict the way banks can use past losses to reduce their tax bills. The new measures anounced in the budget will bring in £2bn over the rest of the decade.
“This is the fifth new bank-specific tax measure in as many years following fast on the heels of the big rise in March and will increase banks’ tax burden by nearly £2bn. We believe these moves will also undermine competition in the industry by making it harder for smaller players to break through and challenge larger banks,” said Anthony Browne, chief executive of the British Bankers’ Association.
Matthew Barling, banking tax partner at accounting group PwC, said that while banks with large overseas operations would welcome the reforms, the overall tax burden on the sector was rising. “This sends very much a mixed message in terms of competitiveness of the UK as a place for carrying on banking business.”
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