With HSBC, the UK’s largest bank, and Standard Chartered debating whether to move their domiciles outside of the UK, the chancellor announced cuts to the Bank Levy and a change in its scope at his budget yesterday.
What is being briefed as a positive response to competition concerns is in fact a rather embarrassing climb-down.
The rationale for introducing the tax was to prevent banks from benefiting from cuts to Corporation Tax. UK banks are taxed on the value of their debts with a few exceptions.
The problem for UK domiciled banks is that they are assessed on their global balance sheets whilst foreign banks are only assessed on their UK balance sheets. This makes domiciling in the UK a significantly less attractive proposition for the likes of HSBC and Standard Chartered who have a significant proportion of their operations based overseas.
However as banks deleveraged their balance sheets since the crisis, rates were repeatedly hiked in pursuit of an arbitrary annual revenue target of £2.5 billion. Indeed despite a 100 per cent increase in the Bank Levy since its introduction, revenues for 2013-14 were still short of what was forecast at the 2010 Budget.
From January 2016, the rate will start to fall, and from January 2021, the scope of the levy will be changed so that UK headquartered banks are only taxed on their UK balance sheet liabilities. A new 8 per cent tax on bank profits will be introduced from January 2016 to plug the gap.
By January 2021, the rate will have fallen from its current level of 0.21 per cent to 0.1 per cent – the same as it was for 2 months in 2011.
The only logical conclusion that can be drawn from this is that the chancellor has concluded that his initial approach to preventing banks benefiting from his Corporation Tax cuts was not a particularly sensible one.