Osborne's Agenda:
Tougher traps, fewer escapes

Most media attention focused on the public cost of the Chancellor’s £81bn austerity package. Less noticed, says CHRIS BAUR, is the mix of levies and threats directed at the banks.

There are two apparently contradictory conclusions about the impact of Chancellor Osborne’s austerity package on the banks: the first is that its mix of levies and threats is every bit as Draconian as a vengeful public yearns to see; the second is that, in reality, he goes easier on the banks than they themselves had privately feared.

Both are right. It’s simply a question of which audience you’ve been sitting with before you read the reviews. The bitter bit is that the Treasury’s new Bank Levy being imposed from this January will cost banks £1.1bn in its first year, more than double that in its second year, and will rise to £2.5bn in 2013-14.

This, says Mark Hoban, Treasury financial secretary, aims to ensure banks “pay for the potential risks they pose to the economy”. The levy will apply to the global balance sheets of UK banks, and the UK operations of banks from other countries. It will, he insists, “encourage less risky funding and enhance financial stability”.

The sweeter bit is that Ministers haven’t actually finalised the precise rate of Levy yet. And, even while they do so, experts busily calculate that, because of parallel cuts in Corporation Tax from 28%to 24%in the next four years, some major banks – like State-backed Lloyds Banking Group and Royal Bank of Scotland – might actually finish up better off.

In addition, intensive summer lobbying by the banks has persuaded the Treasury to concede that equity and some retail deposits will be excluded from the Levy. “Uninsured” deposits – not covered by government guarantees – will qualify for a 50%reduction on the Levy to the advantage of banks like HSBC and Standard Chartered with significant unprotected Asian deposits.

Predictably, therefore, another section of the audience dismisses all this as “pathetic”. Banks are already carrying forward some £19bn of tax losses to offset against future bills, argues TUC general secretary, Brendan Barber: “Those who caused the recession will be cracking open the champagne.” None of this is the whole story, though. Three components of the Government’s approach illustrate the real uncertainties.

Double whammy
Until the Government explains how its Bank Levy will dovetail with similar taxes abroad, one big worry for the banks with large international businesses is that they might end up being taxed more than once on the same operations.

The British Bankers’ Association accuses the Treasury of being “largely silent” on how its Levy will interact with taxation in, for example, France, Germany and Sweden. “There’s no international consensus on how banking activities should be taxed,” it says. “The G20 members still hold very different views.” Until this is clarified, some banks face “multiple taxes by multiple jurisdictions on the same activities”.

The Treasury says it’s working with other governments to resolve the issue, but some legal experts doubt their ability to reach agreement without “an unprecedented level of international co-ordination”. And the trouble is that, if foreign banks are excluded, critics fear British banks will have to shoulder even more of the tax burden.

Paradoxically, it’s also feared that the exclusion of some liabilities from the Levy could mean big UK banks like Barclays, HSBC and RBS paying more. All institutions will now pay the Levy only on liabilities of more than £20bn. This effectively shrinks the pool of taxable assets, leaving some to forecast that the Treasury will have to raise its final percentage charge on banks’ balance sheets to meet its £2.5bn target.

Those bonuses
Beyond the Bank Levy itself, the Government says it’s acting “to tackle unacceptable bank bonuses”. It is consulting on a remuneration disclosure scheme and, working with international partners, will explore the costs and benefits of a Financial Activities Tax on profits and remuneration.

As part of its review of its Remuneration Code, Ministers have asked the Financial Services Authority to:
• consider imposing more stringent requirements on the deferral and award of variable pay
• examine mechanisms for strengthening the link between long-term performance and remuneration
• consider how to vary capital requirements to offset risk in remuneration practices.

The Chancellor threatens to block the payment of large bonuses unless banks show they’re starting to lend again to households and companies. The last government introduced a 50%tax band for those earning more than £150,000 a year.

As things stand, the Centre for Economics and Business Research reckons about £4.1bn of the banks’ £7bn 2010 bonus pot will go to the Exchequer in tax.

Tax dodgers
The Treasury says it’s rolling up its sleeves to become more aggressive with banks that avoid tax. Right now, it’s estimated that only four out of the 15 biggest banks operating in Britain have signed up to a voluntary Code of Conduct requiring them to “comply not just with the letter but the spirit of the law” and to provide early information to Revenue & Customs about new schemes.

Evidently, that Code – launched by the last government – has been largely ignored. So the Chancellor has given all the banks an end of November deadline to sign up, and has made it plain that those refusing will face increased pressure by the tax authorities which will be equipped with an “enhanced capability to make sure that banks pay what is due”.

And he wants banks to provide “real time” information to HMRC about new “tax structuring” schemes, so the authorities could rule on their acceptability.

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