BusinessCompany NewsSuccess of bank levy scheme hangs on G20

Success of bank levy scheme hangs on G20

Without international consensus, UK-based banks may be vulnerable to foreign competitors after George Osborne introduced a new bank levy in the Budget

The success of George Osborne’s £2bn bank levy will hang on the outcome of a
meeting of G20 leaders, tax experts claim.

The new chancellor will hope to walk away with some international consensus,
however limited, on bank levies when he meets with G20 leaders in Toronto this
week.

Failure to do so may leave UK-owned banks ­vulnerable to their foreign-owned
competitors, according to tax experts.

Nigel Harman, head of banking at KPMG, said that without international
co-­ordination, foreign-owned banks will be able to move their operations
offshore, while UK-owned banks will be left with little option but to take the
hit.

“The big UK banks will bear the brunt and the international banks will have
the choice of where to locate,” he said.

“It will cause banks to evaluate carefully whether they want to run their
operations over the UK or in a lower capital jurisdiction.”

It’s a view echoed by Andy Greenwood, partner in Alvarez & Marsal Taxand.
“It would be easier for foreign-controlled banks with UK branches to move
business than UK owned banks,” he said.

The levy will be based on banks’ total liabilities, in their consolidated
statements, minus their safer Tier 1 capital and retail deposits.

According to Budget papers the annual levy will raise £1.1bn during 2011/2012
and £2.4bn by 2014/2015.

Osborne tried to blunt criticism that the new levy will disadvantage UK banks
internationally. During the Budget, he released a joint statement by French and
German governments who also pledged to adopt similar levies.

However, KPMG’s Harman said banks are unlikely to defect to France or Germany
and that the US, Asia or Canada might prove more attractive relocation
destinations.

“It’s like a see-saw. At the moment the UK looks like an attractive place to
do banking for all sorts of reasons…add more weight to the other side of the
see-saw and it will tip,” he said. “We are getting closer and closer [to
tipping].”

Canada has already indicated it will not bring in a banking tax, while parts
of Asia are yet to declare a position. US President Barack Obama has announced a
levy but it has not yet been approved by US Congress.

The British Bankers’ Association warned a poorly planned bank levy may “hurt
our national interests or provide an unfair advantage for other businesses
operating here.”
“Bank levies need to be ­co-ordinated internationally: they must not prevent the
industry in the UK from being able to compete,” the body said in a statement.

“It is essential that the international banks do not find themselves taxed
multiple times for the same thing.”

The levy comes about seven months after a bank payroll tax was introduced on
bankers’ bonuses by former chancellor Alistair Darling. The levy was charged at
a rate of 50% on discretionary bonuses received by 5 April but will not be
continued under Osborne.

Peter Maybrey, financial services tax partner at PwC, said while the payroll
levy is very different from the new bank levy, they will raise similar amounts.

“The amounts of money that are expected to be raised are of a similar order
of magnitude,” he said.

Maybrey believes it will be shareholders who will bear the brunt of the new
levy. “If it is introduced in one country and not others it may be more
difficult for banks to pass on the costs of the levy, which must be borne by
shareholders,” he said.

Harman, however, believes that it may be smaller borrowers who pay for the
new measure. “It will have an aggregate affect on the cost of borrowing and the
banks will seek to recoup that cost in one way or another,” he said.

“The cost may fall more heavily on smaller borrowers than on larger borrowers
as banks seek to pass on the cost.”

Osborne said more details about the new levy will be released in the next few
months.

In our view

A global approach is needed to co-ordinate this new levy. George Osborne
deserves some praise for having the courage to go it alone, however he is taking
a risk. Without an international ­consensus we might see a slow drift of
business away from the UK.

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