Taxing times

The Government recently published details of its bank tax initiative. Louise Higginbottom and Judy Harrison look at the issues associated with such a levy and how it could impact on the UK economy

The UK Government has published details of the banking levy it intends to introduce as part of a consolidated initiative between the UK, France and Germany.  Despite best efforts to agree an international bank levy, followed by attempts to introduce a Europe-wide tax, the UK, France and Germany each decided to unilaterally introduce their own tax.  The UK levy will be imposed from 1 January 2011.

Details of the charge

The UK tax will apply to banks, including the UK operations of foreign banks, which have ’relevant liabilities’ on their balance sheets of at least £20bn.  It will not apply to other financial institutions.  ’Relevant liabilities’ refers to a bank’s balance sheet liabilities less tier 1 capital, insured retail deposits, repos secured on sovereign debts and policyholder liabilities of retail insurance business.

During 2011, the levy will be charged at the rate of four basis points on the relevant liabilities.  After 2011, the levy will rise to seven basis points. Longer maturity wholesale funding will be taxed at half the normal rate but banks will not be able to obtain a corporation tax deduction for payments of the levy.

Possible consequences

Although the statement from the British, French and German Governments indicated that they will continue to seek agreement on an international levy, it seems likely that the three Governments have accepted that this is improbable in the near future.  Logically, it seems unlikely that a Government would introduce its own tax if it believed that wider agreement was still possible.  This is because any tax imposed unilaterally would need to be lower than an international levy, in order to avoid reducing the competitiveness of the country imposing it in comparison with the rest of the world.

The intention of the levy is to encourage prudent fund raising by banks.  Given that raising tier 1 capital is often relatively expensive and inflexible in comparison to other ways of raising finance, it is questionable whether this aim will be achieved.  Although the Government perceives that banks have relied on risky financing, the banks have used the money raised to make loans.  One possible consequence of banks reducing their dependence on this sort of money raising, is that they may have less money to lend.  Such behaviour is the antithesis of how the Government wants banks to behave.

The impact of the levy will differ between the banks, depending on how they finance their lending activities.  It is anticipated that Barclays, Lloyds and RBS may be required to pay a significant amount of tax.  HSBC and Standard Chartered might pay a relatively small amount of bank levy because they finance most of their lending through customer deposits.

Banks could be looking at ways to pass the cost of the levy onto their customers.  Since insured retail deposits are excluded from the scope of the tax, it is unlikely that banks will seek to pass some of the additional cost onto their depositors.  Borrowers may not be so lucky.  Many existing loan agreements (including the Loan Market Association standard loan agreements) may in theory permit the cost of the levy to be passed to borrowers.  When negotiating new loans, both banks and borrowers should consider where the cost of the bank levy should fall.

It also seems likely that banks will consider whether it is feasible to reduce the relevant liabilities shown on their balance sheets for the purposes of calculating the amount of the levy.  The UK rules will contain an anti-avoidance provision to try and restrict the ability of banks to do this, although no details have yet been published.  It appears that there may be scope for non-UK banks to recognise liabilities in the non-UK parts of their balance sheets and consequently remove those liabilities from the ambit of the charge. Some banks may consider whether it is possible to derecognise liabilities for accounting purposes. 

Given that the effect of the bank levy is ameliorated to some extent by the reduction in the rate of corporation tax, it is not thought that the result of this levy will be that significant numbers of banks will move away from the UK.  This is particularly true in the case of those banks which have significant carried-forward trading losses, which would be lost if the bank exited from the UK; although the value of those losses will be reduced by the fall in the corporation tax rate.


A consultation on the details of the proposed bank levy will take place over the summer, and full details of the tax will not be available until after the consultation.  The Government anticipates it will raise more than £2bn annually from the tax; whether it will manage to encourage prudent behaviour by the banks without reducing the availability of credit is yet to be seen.

Louise Higginbottom is a partner and Judy Harrison a senior associate at Norton Rose