Bigger banks hardest hit by 8% corporation tax surcharge

Changes to the tax regime for banks mean that the six largest retail banks will continue to pay higher effective rates of tax, estimated at around 20% to 25% of profits in 2016, while new entrants and building societies are likely to pay around 6%, according to analysis by the Competition and Markets Authority (CMA)

The CMA analysis is part of the competition watchdog’s review into retail banking, which assesses the impact of the changes to the bank levy and the new corporation tax surcharge, and whether the new tax measures will deter new entrants to banking.

The increased bank levy and new corporation tax surcharge were announced in the July 2015 Summer Budget and are effective from 1 January 2016. The headline rate for the bank levy is reducing from 0.21% to 0.10% over the next six years.

Treasury data submitted to the CMA as part of the review shows that between 60 and 100 banks are potentially within scope of the new 8% corporation tax surcharge which applies to ‘total taxable profits’ computed for corporation tax purposes, excluding group relief from non-banking companies.

Larger banks will remain subject to the bank levy from which smaller banks are exempt due to the £20bn threshold.  Banks are also exempt if they fall within a £25m annual profits allowance, so participants with profits below that level will not pay the surcharge. Losses arising prior to 2016 are excluded, which effectively excludes any legacy losses incurred during the financial crisis and start-up losses of new entrant banks.

The Treasury submitted that the six largest banks will have an effective additional rate of 10% or more as a percentage of profits (taking the bank levy and the corporation tax surcharge together) compared to a rate of less than 8% for smaller banks.

The effective additional rate for the smallest banks is 0% because of the £25m annual allowance, with around 90% of building societies removed from scope.

For banks and building societies with profit above the £25m allowance, the effective tax rate increases gradually, according to Treasury figures, while the combined effective tax rate under the bank levy and the CTS is considerably higher for the larger banks.

Five of the largest banks are subject to an effective rate (ie, bank levy and bank surcharge payments as a proportion of profit) of more than 10% or greater as a percentage profits, compared to a rate of significantly less than 8% for many of the smaller banks and building societies.

The CMA calculated that in 2016, the bank levy and CTS liability as a proportion of profit for the six largest retail banks averages approximately 20% to 25%, compared to approximately 6% for other retail banks.

In 2021, when the change to the base of the bank levy from global to UK balance sheet liabilities takes effect, the six largest retail banks will continue to pay approximately 10% to 15% compared to approximately 7% for other retail banks.

Overall, the CMA estimates that the group of 17 retail banks included in its analysis which are exempt from the bank levy but liable for the corporation tax surcharge will be exposed to a net increase in tax liability of around £75m to £95m in 2016, potentially increasing to £150m to £17m in 2021.

This group of 16 banks includes both recent entrants as well as established banks with large market shares in the relevant geographic market in which they operate (for example AIB, Bank of Ireland and Danske).

The CMA paper, Retail baniking – corporation tax surcharge and bank levy, is available here

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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