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Tax Policy

Volume 583: debated on Thursday 26 June 2014

The bank levy, a permanent tax on banks’ balance sheet equity and liabilities, was introduced by the Government from 1 January 2011. It remains an essential policy tool, in helping to ensure a fair contribution from the banking sector and provide incentives for banks to move towards more stable funding profiles, increasing their resilience to liquidity shocks.

Despite recent changes to simplify the tax base and better align it with the regulatory regime, a number of concerns have been repeatedly raised by the sector in respect of the levy’s existing design:

banks’ balance sheets, and thus bank levy receipts, remain highly sensitive to economic and regulatory change;

the need for successive changes to the bank levy rate in order to achieve the revenue target has, it is claimed, created some uncertainty and impacted on perceptions of UK competitiveness; and

the marginal cost of the bank levy has, it is claimed, created risks of distortion and unintended impacts on banks’ behaviour.

Accordingly, the Government announced that they were willing to explore (on a non-committal basis) whether a revenue-neutral reform to the bank levy charging mechanism, in which the headline rate would be replaced by a new banding approach for determining a bank’s charge, could help to address these concerns and increase the predictability and sustainability of bank levy receipts.

Feedback from banks, building societies and advisory bodies as part of the consultation process suggests that it would not, irrespective of how it was structured.

Instead, it was considered that a banding approach 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.

Reflecting on these concerns—which were raised by banks of different domicile, structure and balance sheet size and trajectory—the Government have decided against the introduction of a banding approach for the bank levy at Finance Bill 2014 and have no plans to consider this idea further.

Two wider revenue-neutral proposals were put forward by the sector as part of the consultation, both of which may warrant further evaluation.

First, a technical amendment was proposed to the bank levy legislation, aiming to address certain banks inability to accrue the costs of the bank levy for quarterly reporting purposes, which is seen to create an inaccurate representation of quarterly operating profit, reduce comparability in interim results and necessitate careful market and shareholder explanation.

Secondly, a number of respondents suggested that the levy could be applied to the opening rather than closing balance sheet, in order to provide greater certainty to banks over their in-year charge and allow them to make more informed commercial decisions over short-term investment horizons.

The case for making these changes remains unclear and the Government need to give further consideration as to their merit, legality and legislative deliverability. However, the Government intend to maintain a dialogue with the sector on these points.

Overall, the Government would like to thank those who participated in the consultation process. The views put forward have been, and will continue to be, valuable in informing policy decisions in this area.