Over the last 12 months there have been a raft of provisions aimed at banks and financial institutions on both the regulatory and fiscal sides.
On the fiscal side, the Bank Payroll tax caused confusion and consternation in equal parts early in the year. The tax was billed as a one off, but the threat of reintroduction remains if bonus payments are not restrained. The introduction of 50% top rate of income tax though not limited to the financial services sector will fall substantially on employees in the sector.
The bank levy will be introduced from 1 January 2011 for the largest financial institutions. Subject to an initial lower rate, it will be levied at 0.07% of liabilities (subject to certain exclusions eg for Tier 1 capital) where liabilities exceed £20bn. A lower rate is levied on longer maturity funding. Whilst there are no official proposals to introduce a “Robin Hood tax” (a tax levied on financial transactions – in particular foreign exchange transactions) there remain calls for such a tax.
Are these measures “banker bashing” as some would say or a proportionate response to the demands placed on the taxpayer by banks? In our view the Bank Levy, though there will inevitably be teething problems, falls within the “proportionate response”. Any one in any doubt should look at Ireland. The largest financial institutions, even if themselves not bailed out, have benefited from various government initiatives designed to provide support to the financial services sector. It does not seem unreasonable that a greater contribution should be made by the sector to the Exchequer. There are concerns, which we share, about some of the details that the extra territorial effect levy may cause the UK to lose business, in particular, acting as an intermediate holding company jurisdiction for eg EMEA subgroups, but such problems can be resolved.
The so-called Robin Hood tax however is a different matter. There seems to be little official support for it but we would prefer if all ministers would formally rule it out. It would support the Government desire to set out a clear road map for corporate tax and avoid needless speculation which can affect the market. Unless such a tax were applied globally, it is very likely that arbitrage opportunities would cause business to flow out from the UK. It also has the potential to cause chaos.
We started with the question as whether the taxes on financial sector will kill the golden goose. Some restructuring is likely to occur. However, the key observation with such taxes is that, although popular, in reality the cost is ultimately likely to be passed to the customer.