As discussed in my Viewpoint video, the UK government is heavily reliant on taxes paid by financial services. The finance and insurance sector was the largest single contributor to corporation tax in 2017/18 accounting for 26% of corporation tax liabilities (£14.1 billion). The tax burden for banks is particularly heavy. Banks have seen a 50 per cent rise in UK taxes borne over the past five years. This is not sustainable in the long term.
Why has the burden on banks operating in the UK increased so much?
It is the result of a combination of high employment taxes, irrecoverable VAT and specific measures introduced in response to the financial crisis: the bank levy, bank surcharge and loss restriction rules. 43% of the taxes borne by bank are not even dependent on profits!
How does the UK compare with other jurisdictions?
A recent report commissioned by UK Finance compares the total tax rate of a model bank in London (47.1%), Frankfurt (44.7%) and New York (33.5%) because these financial centres are readily comparable in terms of tax rates, legal and regulatory structures and their competitive positions. The report illustrates that the fiscal competitiveness of the UK for banking business has declined relative to other global financial centres.
What can be done to improve competitiveness for the UK banking sector?
- Remove the bank levy – as this was introduced in response to the financial crisis, it is time to set an end date (by way of contrast, the German bank levy will be suspended after 2023 when the European Single Resolution Fund target is met).
- Remove the bank surcharge – the UK has a lower CT rate than Germany and the US but the 8% surcharge means banks do not benefit from this.
- Improve VAT recoverability – depending on what happens with Brexit, there may be scope to improve the recoverability of VAT.
- Cap employers’ NICs - the UK total tax rate includes a much higher proportion of social security contributions than Germany and the US where contributions are capped.
According to the modelling in the UK Finance report, if both bank levy and bank surcharge were removed, the total tax rate of the UK would be 32.5%, around 1% less than New York’s current rate.
If the UK does not change its policy on bank taxation, there is an increasing danger that the UK will lose out on revenue from financial services activities which can be relocated to more competitive countries.