Summer Budget 2015: bank levy reduced and replaced with 8% profits surcharge

The banking sector will see its levies change after 1 January 2016, with a reduction over the next six years, replaced however with a surcharge on profits, the Chancellor has announced

In his speech delivering the Budget, George Osborne said that the bank levy was introduced to raise revenue and increase the stability of balance sheets.

‘And it’s worked – but now it risks doing harm unless we change it.

‘So I will, over the next 6 years, gradually reduce the bank levy rate – and after that make sure it no longer applies to worldwide balance sheets.

‘But to maintain a fair contribution from the banks, I will introduce a new 8% surcharge on bank profits from the 1st January next year,’ said Osborne.

The changes to the banking levy will bring in £1,6bn by 2020/21 and will affect UK banks, banking groups and building societies, foreign banking groups operating in the UK through permanent establishments or subsidiaries and UK banks and banking sub-groups in non-banking groups.

Legislation will be introduced in Summer Finance Bill 2015 to amend paragraphs 6 and 7 of Schedule 19 to FA 2011.

For periods falling wholly or partly after 1 January 2016 the rate applying to chargeable equity will be decreased from 0.21% for short term chargeable liabilities and from 0.105 for long term chargeable liabilities to the rates outlined below:

Rate period

Rate for long term chargeable equity and liabilities

Rate for short term chargeable liabilities

1 January 2016 to 31 December 2016

0.085%

0.18%

1 January 2018 to 31 December 2018

0.085%

0.17%

1 January 2019 to 31 December 2019

0.08%

0.16%

1 January 2019 to 31 December 2019

0.075%

0.15%

1 January 2020 to 31 December 2020

0.07%

0.14%

Any time on or after 1 January 2021

0.05%

0.10%

This measure – which is part of the government’s wider plans to reform how banks are taxed - sets out the rate at which the bank levy will be charged for the next 6 years, with the bank levy rate decreasing from 0.21% to 0.18% from 1 January 2016 and then continuing to decrease each calendar year thereafter until 2021.

A proportionate decrease to 0.09% with effect from 1 January 2016 will be made to the half rate, with corresponding reductions being made each following calendar year until 2021.

‘By getting this balance right, it means we’ll actually raise more from the banks this parliament, but at the same time make our country a more competitive place to do business,’ Osborne said.

Matthew Barling, PwC banking tax partner said cautiously welcomed the levy reduction.

'The reform and reduction in the bank levy will be welcomed particularly by those banks with large overseas operations.  

'However, the long term phased nature of the reform coupled with the new profits based 8% corporation tax surcharge means that the overall tax burden on the banking sector will go up during this Parliament.  This sends very much a mixed message in terms of competitiveness of the UK as a place for carrying on banking business,' said Barling.

KPMG's financial services partner, Tom Aston, said that larger banks will be pleased at the abrupt change of direction on the bank levy, with rates now falling over the next six years back to levels closer to those envisaged when the tax was first introduced.

'They are also likely to welcome the fact that bank levy rates have been mapped out several years ahead – in previous budgets part of the concern has been not just the increases in this tax, but also their unpredictability.

'The move towards basing the bank levy on UK rather than global balance sheets is also helpful in removing a potential incentive for banking groups to leave the UK – even though this change is not expected until 2021.

'However, the flipside of this is the extra 8 per cent tax rate on bank profits from 1st January 2016. Whilst some banks may see this as a price worth paying for the bank levy reductions, this change taken with those in other recent budgets will mean that some banks pay a very high effective tax rate indeed on their profits in the next few years.”

'Whilst some relief is provided by a £25 million annual exemption, many smaller and challenger banks who were not previously liable for the bank levy, will be impacted by the new bank profit surcharge,' Aston said.

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