The Chancellor has stated that the Levy is to target a particular sum, rather than being set at a particular rate, in order to balance fairness with the competitiveness of the UK banking sector. Since the targeted sum is £2.5 billion and some have estimated that the proposed rates of 0.07 and 0.04 % will generate well in excess of this target, it is possible that these rates will be reduced following introduction of the Levy.
The consultation period ends on 5 October 2010, draft legislation will be published later in the autumn and “final draft legislation” for inclusion in the 2011 Finance Bill will be published towards the end of 2010.
Scope of the Levy
The Levy is to apply to:
- the global consolidated balance sheets of UK banking groups and building societies;
- the aggregated UK subsidiary and branch balance sheets of foreign banks and banking groups operating in the UK; and
- the balance sheets of UK banks in non-banking groups,
whose total liabilities and equity are £20 billion or more.
HM Treasury is seeking views on:
- the proposed definition of the taxable entities. “Bank”, “banking group” and “foreign bank” are to be defined by reference to those definitions used for the Bank Payroll Tax (Sch. 1 to Finance Act 2010) except that groups will be based upon accounting rather than tax concepts. A foreign-headed banking group will only be liable to the Levy where it has a UK resident bank as a member or a UK branch. “Building Society” will have its usual meaning;
- how the aggregation of different entities’ relevant liabilities could be improved or simplified. Where the UK banking business features in both a global banking group’s accounts and also UK sub-group consolidated accounts, it is proposed that the balance sheet in the sub-group accounts will be used for the Levy. Another proposal is that, where necessary, balance sheets will be consolidated as they would be under UK GAAP or IFRS (e.g. UK inter-company balances would be ignored) and would show liabilities and equity extracted from UK GAAP and IFRS–compliant balance sheets;
- the most suitable method of calculating the liabilities of branches. The Treasury proposes using the capital attribution tax adjustment (“CATA”) method for determining the liabilities of UK branches of foreign banks, with an attribution of assets on the basis of either total liabilities of the entity or the interest bearing liabilities held in branch; and
- the impacts of setting an allowance (with a higher rate of Levy), rather than a threshold.
The Levy is to be based on the total liabilities and equity as reported in the relevant accounts, excluding:
- Tier 1 capital (Basel and EU capital requirements definition);
- repos secured on sovereign debt; and
- policyholder liabilities of retail insurance (life and non-life) businesses within banking groups.
The reason for the exclusion of policyholder liabilities is that banks are already required to contribute to policyholder protection schemes that provide cover for such liabilities in the event of failure.
It is intended to set the main rate Levy at 0.04% in 2011 and 0.07% in 2012, with a Levy at half these rates for longer–maturity funding (more than one year to maturity at the balance sheet date). Borrowings from foreign group members will be assumed to be short-term liabilities.
The current proposal is to allow derivatives with the same counterparty to be netted off in accordance with the Basel II standard.
The Levy will not be deductible for corporation tax purposes.
HM Treasury is seeking input on the following:
- the definition of “insured retail deposits” and whether there are other suitable forms of insurance/guarantee for retail deposits. It is intended that retail deposits must be covered by a statutory or State-run guarantee or insurance scheme for them to be “insured”;
- whether repos within the FSA liquid asset buffer requirements also be excluded and whether there are other types of repo with similar risk and liquidity;
- whether the insurance exclusion properly captures those liabilities covered by protection schemes and whether there are other items similarly covered; and
- the most accurate and efficient method of calculating derivative liabilities.
HMRC will process and administer the Levy.
A single UK company group member will be responsible for making the return on behalf of the group (a supplementary page on its CT600), submitting financial statements and tax computations, and paying the Levy. The Levy will be payable in quarterly instalments (starting six and a half months after the start of the accounting period) and all members of the relevant group will be liable for the Levy jointly and severally.
The Levy’s commencement date will be 1 January 2011. For periods in which the commencement date falls, liabilities will be reduced by reference to the proportion of the period that falls prior to that date. Any payments due before Royal Assent of the Finance Act 2011 under the quarterly instalment payment regime will be payable 30 days after Royal Assent.
There will be an anti-avoidance provision in the usual form that disregards transactions etc. that have as (one of) their main purpose(s) the avoidance of the Levy. It is also proposed to include the Levy specifically in the Disclosure of Tax Avoidance Schemes regime.
The Government is also aware of the possibility of double taxation, given the lack of coverage of such a levy in the UK’s current treaty network and the likelihood of similar levies in other jurisdictions. This appears to be the thorniest issue to have stemmed from the proposed bank levies, seemingly made worse by a lack of a unified approach across different jurisdictions. Germany is already concerned with the UK’s proposed definition of “bank” including UK branches of banks resident in Germany, since it is Germany that supervises such banks and would be ultimately responsible for them during any crisis.
The Government has stated its intention to take forward urgently discussions with other countries intending to impose a similar levy. It remains to be seen whether or not the country where the bank is resident would have to give credit for bank levies imposed by other countries.
HM Treasury is also seeking to establish from the industry the weight of the compliance burden, i.e. the time involved in calculating the liability, and the staff and IT requirements.
It has been observed that the more expensive forms of funding, e.g. fixed-term bonds in excess of one year, will benefit from the lower rate of Levy, which raises the question of whether the Levy is really just a deterrent, rather than purely a revenue-raising measure. The wider context of banks now making large profits with a wealth of past losses to mitigate corporation tax lends support to this suggestion.
Banks should consider their balance sheets or even the possibility of restructuring their groups sooner rather than later. Although it seems that the Levy does not warrant emigration, it may be viable to focus more on retail funding, for example, or for foreign banks to “deleverage” UK group members or branches at the expense of other members situated in jurisdictions without a similar levy. In doing so, banks should be careful not to risk losing any UK corporation tax losses generated in the recession and be aware of the intention in the US, France and Germany (and others) to raise a similar levy.
On the whole, it seems HM Treasury will require much industry input to produce a Levy that is fair and workable in practice, and extensive discussions with other governments to deal with the issue of double taxation.