THE increasingly unpopular levy bank’s pay on their assets is to be gradually phased out and replaced with a new surcharge on their profits, chancellor George Osborne said in his first all-Conservative Budget.
Bowing to pressure from financial services firms including HSBC, who have threatened to quit the UK as a result of the levy, Osborne said he would gradually reduce the levy rate over the next eight year and, after that, make sure it no longer applies to worldwide balance sheets.
The levy – an annual tax based on the balance sheets of UK banks and overseas banks doing business in the UK – will be replaced by an 8% surcharge, most likely based on what the firms currently pay in corporation tax.
Charles Beer, managing director for real estate, corporate and international tax with Alvarez & Marsal, told Accountancy Age the move is “clearly designed” to encourage banks with large overseas operations, such as HSBC and Standard Chartered, to remain in the UK.
“It takes away the incentive to move elsewhere. By the time you get to 2020 it won’t matter where your HQ is because it is only based on UK balance sheets,” he said.
According to a HMRC document, the changes will bring in £415m for the Exchequer in 2016/2017, £555m in 2017/2018, £365m in 2018/2019, £225m in 2019/2020 and £105m in 2020/2021.
Matthew Barling, PwC banking tax partner, said the reduction will be welcomed by those banks with large overseas operations. However, the long term phased nature of the reform coupled with the new profits based 8% corporation tax surcharge means that the overall tax burden on the banking sector will go up during this Parliament.
“This sends very much a mixed message in terms of competitiveness of the UK as a place for carrying on banking business,” he said.
In a separate move to make the UK more tax competitive, Osborne revealed that the headline rate of corporation tax will be cut again from 20% to 18% by 2020, with an interim cut in 2017.
“We are giving businesses the lower taxes they can count on to grow with confidence, invest with confidence, create jobs with confidence,” Osborne said. “A new 18% rate of corporation tax, sending the message out around the world, loud and clear, that Britain is open for business.”
However, the reduction could be offset by higher costs for employers such as meeting the living wage requirement of £9 an hour and the apprenticeship levy.
Stella Amiss, international tax partner at PwC, said it was a “bold and surprise” move.
“Business weren’t calling for a further rate reduction, and it’s expensive – £6.6bn over five years. But it sends a clear signal that the Government is pro tax competition and this message may be helpful in attracting overseas business to UK shores,” she said.