The bank levy was a measure introduced by the UK government in January 2011 in an attempt try to claw back some of the country’s deficit, whilst increasing regulation enforced on those thought to be responsible for the financial crisis. Since I am currently interning in Financial Services Tax, I thought I would explain the levy and give you a little insight into how the change has affected the team here at Grant Thornton.
The bank levy was put into place with the aim of reducing wholesale financing – that is, the lending of money between financial institutions, including funds, stockbrokers and banks. This was intended to reduce the risk of another financial crisis being triggered by uncontrolled borrowing and lending. Banks no longer only use the deposits entrusted to them to issue loans as they would have a couple of decades ago; they now also have the ability to reach out to international markets and borrow money almost limitlessly. Prior to 2008, this money had become increasingly recycled across the world between firms. Banks would create short term debt with the intention of returning to borrow from markets every few days to renew it. That debt would then be used to fund long term loans, such as mortgages. When the crisis hit, investors suddenly refused to refinance these short term loans and even profitable banks were facing collapse due to lack of liquidity (or the availability of assets).
Since 2011, banks operating in the UK now have to pay a 0.21% tax on all borrowing worldwide; a value that has changed nine times since it was first introduced. To qualify, their tax base (total liabilities and equity) must exceed £20bn, a cut-off intended to encourage firms to shrink their businesses. The tax rate is also lower for long term debts because these are considered inherently less risky. For example, if a bank has a short term loan that it is unable to repay, it is likely to default, whereas loans that don’t have to be repaid for a year mean that the bank can probably weather the crisis.
The 0.21% rate may appear small, but this has tripled since the original 0.07% proposed in 2010. For example, HSBC’s large balance sheet incurred a cost of £750m towards the total £1.9bn collected by the UK government in bank fees last year. KPMG has calculated that the effective tax rate of the top five banks has risen from 36% in 2011 to 71% of profits in 2013. The levy is another post-crisis cost that eats into the banks’ profit margins, with the difference between the interest they pay on deposits and the interest they earn on lending becoming even smaller. The cost of the levy can be passed on to lenders and borrowers by lowering and raising interest rates respectively.
Many leaders in finance have criticised the bank levy and accused it of discouraging financial firms from doing business in the UK at a time when the government should be promoting growth in the economy. Most notably, HSBC is currently threatening to move its headquarters from London to Hong Kong, New York or Singapore. Since changes in George Osborne’s most recent budget announcement, these attitudes have softened. The levy is now being cut to 0.1%, however, an 8% surcharge is being introduced on 1st January 2016. Unlike the levy, this will be dependent on profitability as opposed to debt, therefore making it an easier pill to swallow.
Where does this leave Grant Thornton? When the bank levy was originally introduced, the Financial Services Tax team here at Finsbury Square would have been relied upon by their clients to inform them of all changes in costs, legislation and advice on structuring. They may have also approached potential clients with presentations and portfolios of the services that Grant Thornton could potentially offer in light of the changes. The same occurred after the Chancellor’s budget announcements of a few weeks ago – the team has had to learn, consider strategies and adapt quickly in order to be ready for any client questions or requests.
If you would like to read more about the 2015 Budget, read my blog here. If you would like to learn more about Financial Services Tax, head to the Grant Thornton careers pages. Alternatively, I would be happy to answer any questions here!