Bank levy aims to generate £2.5 billion a year

Financial News

Banking tax levy unveiled to generate capital and reduce investment risk.

Tax reforms on banks revealed by the Treasury to promote safety practices within financial institutions.

A new tax levy on bank balance sheets expected to raise £2.5 billion a year was announced by the government yesterday.

The Treasury said the draft legislation, which will affect UK banks and the UK operations of banks from other countries from January 2011, will encourage banks to take fewer risks with their funding.

The total size of bank balance sheets will be taxed excluding items such as bank capital and retail deposits covered by insurance. Uninsured deposits will be taxed at half of the final rate level, which is yet to be agreed upon.

Mark Hoban, financial secretary to the Treasury, said the levy will work in two key ways, “firstly, ensuring that banks make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy” and “secondly, the final scheme design incentivises banks to make greater use of more stable financial sources, such as long term debt and equity”.

Chancellor George Osborne said he wanted to “extract the maximum sustainable tax revenues from financial services” during Wednesday’s Spending Review announcement.

“We neither want to let banks off making their fair contribution, nor do we want to drive them abroad” he continued.

However, overseas banking operations will inevitably be affected by the levy, according to the British Banker’s Association, which said “the Treasury’s statement is largely silent on how the levy would interact with taxation in other countries. Until this is clearer, some banks could be taxed multiple times by multiple jurisdictions on the same activities”.

The final rate level, which will be less than 0.1%, will be decided upon by the end of the year. However, smaller banks and building societies will not be affected.