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Taxation of banking

Published Friday, September 4, 2015

This note looks at the public debate about reforming the tax treatment of the banking sector in the wake of the financial crisis, before discussing the different approaches taken by the Labour Government, its Coalition successor and the new Conservative Government.

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In December 2009 the then Chancellor, Alistair Darling, announced a new bank payroll tax: “a special one-off levy of 50 per cent. on any individual discretionary bonus above £25,000” to “be paid by the bank, not the bank employee.”  Mr Darling anticipated that the levy would apply from the date of his statement to the end of the tax year – 5 April 2010 – and raise “just over £500m”.[1]  In the March 2010 Budget the Labour Government confirmed that the payroll tax would not be extended, though its yield proved far higher than initially forecast: £3.5 billion in gross terms.[2]

The Coalition Government set out its priorities for taxation in its agreement, published in May 2010, and as part of this stated that it would “introduce a banking levy and seek a detailed agreement on implementation.”[3]  In his first Budget speech on 22 June 2010 the Chancellor George Osborne announced that a new levy would be introduced from January 2011 to “apply to the balance sheets of UK banks and building societies, and to the UK operations of banks from abroad” which would “generate over £2 billion of annual revenues.”[4]  A consultation paper was published in July, followed by draft legislation in December 2010. 

Over the 2010-15 Parliament the Coalition Government amended the rates of the levy several times, with a view to maintaining the yield that it had initially anticipated.

First, in February 2011 Mr Osborne confirmed that the rate of the levy would be higher than initially proposed in its first year of operation,[5] and in the 2011 Budget the Chancellor announced a further change in rates to offset a 1% cut in the main rate of corporation tax for 2011/12, additional to the reductions in corporation tax announced in his first Budget.  In his Autumn Statement on 29 November 2011 Mr Osborne announced a third change in the levy rates from January 2012 to offset an expected shortfall tax receipts.[6]  In his 2012 Budget Mr Osborne announced that the main rate of corporation tax would be cut by an additional 1%, and that the rates of the bank levy would be increased from 1 January 2013, to take account of the benefit that the banking sector would enjoy from this tax cut.[7]  In his Autumn Statement on 5 December 2012 Mr Osborne another 1% reduction in the main rate of corporation tax from April 2014, to 21%. As before, the rates of the bank levy would be increased to prevent the banking sector from benefiting from the tax cut.[8]  In his 2013 Budget the Chancellor stated that from April 2015 the main rate of corporation tax would be set at 20%; the rate in the levy would be increased from 1 January 2014 accordingly.[9]

In his Autumn Statement on 5 December 2013 Mr Osborne announced that the rate for 2014 would be increased, and the base of the tax broadened, following a review of the tax over the previous summer.[10] Taken together these changes were forecast to raise £265m in 2014/15, rising to £520m in 2015/16.[11] Draft legislation to be included in the Finance Bill 2014 was published at this time.[12] These changes were confirmed in the 2014 Budget.[13] At the same time the Coalition Government launched a consultation on the merits of a new charging mechanism, in which the headline rate would be replaced by a new banding approach for determining a bank’s charge.[14]  It was anticipated that any changes to the design of the levy – which would be revenue-neutral – would be made by introducing provisions to the Finance Bill 2014 at its report stage.[15]  Responses to the consultation indicated that this reform would “create uncertainty over banks’ charges, strengthen the incentives for activities to be relocated overseas and create arbitrary differences between banks’ effective tax rates and the relevance of the levy’s behavioural incentives”, and no changes to the tax were made at this time.[16]

Finally in the Government’s last Budget before the General Election, the Chancellor announced an increase in the rates of the levy, on the grounds that, “as our banking sector becomes more profitable again … it can make a bigger contribution to the repair of our public finances.”[17] The new rates would apply from 1 April 2015, and it was estimated that this would raise around £900m a year from 2016/17.[18]

Following the 2015 General Election, the Conservative Government presented its first Budget on 8 July 2015. In his Budget speech the Chancellor, Mr Osborne, announced two changes to bank taxation: “over the next six years [I will] 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 1 January next year.”[19] Annual Exchequer receipts from these two measures are estimated to peak in 2017/18 at £555m, before falling each year to reach £105m by 2020/21.[20] Over this period the Exchequer will also benefit from higher corporation tax receipts from the banking sector, as from 2015/16 a 50% limit has been set on the losses banks may carry forward, to set against taxable profits in future years.[21]

Over the first three years of its operation, the bank levy raised £1.6bn in both 2011/12 and 2012/13, and £2.2bn in 2013/14.[22] HM Revenue & Customs estimate that tax receipts as a whole from the banking sector – that is, PAYE, corporation tax and the bank levy – were £21.3bn in 2013/14.[23]

It is now estimated that the bank levy will raise £2.8bn in 2014/15. Levy receipts are projected to peak in 2015/16 at £3.7bn, before falling each year to reach £2.2bn by 2020/21. Over this period receipts from the bank surcharge are forecast to be £900m in 2016/17, and then £1.3-1.5bn each year in successive years.[24]

HM Revenue & Customs have published detailed guidance on both the bank payroll tax, and the bank levy, in two online Manuals.

Notes : 

[1]     HC Deb 9 December 2009 c367

[2]     Office for Budget Responsibility, Economic and fiscal outlook, Cm 8036, March 2011 p103 (Table 4.7)

[3]     HM Government, The Coalition: our programme for government, May 2010 p9

[4]     HC Deb 22 June 2010 c176

[5]     HC Deb 8 February 2011 cc310-327

[6]     HC Deb 29 November 2011 c805

[7]     HC Deb 21 March 2012 c803

[8]     HC Deb 5 December 2012 c881. This was forecast to raise £545m per year from 2014/15 (Autumn Statement, Cm 8480, December 2012 para 2.79, Table 2.1 – item 34).

[9]     HC Deb 20 March 2013 c940. The increase in the levy rate was forecast to raise around £250m from 2015/16 (Budget 2013, HC 1033, March 2013 p65, Table 2.1 – item 40).

[10]    HC Deb 5 December 2013 c1107

[11]    Autumn Statement, Cm 8747, December 2013 p78 (Table 2.1 – item 20)

[12]    Details on each measure were given in three impact notes published by HMRC at this time: Bank levy review, Bank levy 2014 rate change, & Code of Practice on taxation for banks, December 2013.

[13]    Budget 2014, HC 1104, March 2014 para 2.122-4

[14]    The consultation was launched on 27 March: A bank levy banding approach: consultation, March 2014. Responses were invited up to 8 May 2014.

[15]    Budget 2014, HC 1104, March 2014 para 2.125

[16]    HC Deb 26 June 2014 cc22-3WS

[17]    HC Deb 18 March 2015 c773

[18]    HM Treasury, Budget 2015 Policy Costings, March 2015 p25

[19]    HC Deb 8 July 2015 c326. For details see, HMRC, Bank levy: rate reduction and, Bank Corporation Tax Surcharge, 8 July 2015

[20]    Budget 2015, HC264, July 2015 p73 (Table 2.1 – item 17). See also, HM Treasury, Summer 2015 Budget Policy Costings, July 2015 p16

[21]    It is estimated the total Exchequer yield over the five years 2015/16 to 2019/20 will be around £4bn (Budget 2015, HC 1093, March 2015 p66 (Table 2.2 – item t).

[22]    HMRC, Tax and NICs receipts : information & analysis, August 2015 p6

[23]    HMRC, National Statistics: PAYE and corporate tax receipts from the banking sector, August 2014 p6

[24]    Office for Budget Responsibility, Economic and fiscal outlook, Cm 9088, July 2015 p93 (Table 4.5)

Commons Briefing papers SN05251

Author: Antony Seely

Topics: Financial services, Taxation

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