[Banking] Summer budget... more than we had expected.

Principal Banking Measures

The long-term roadmap for the taxation of banks – as announced in the summer budget – comprises the following three measures:

• The introduction of a new tax on banking sector profits from 1 January 2016, set at a permanent rate of 8% (referred to as Bank Corporation Tax Surcharge)
• A phased reduction of the bank levy rate, from the existing rate of 0.21% to 0.18% from January 2016, 0.17% from January 2017, 0.16% from January 2018, 0.15% from January 2019, 0.14% from January 2020 and 0.10% from January 2021
• A change in the bank levy’s scope from 1 January 2021, whereby in computing the bank levy for UK headquartered banks the overseas subsidiaries will be excluded (this is to counter the relocation threats from HSBC and Standard Chartered)

Our Commentary

The introduction of the Bank Surcharge which looks to tax an inflated profit at 8% in addition to Corporation Tax on the actual taxable profit. This marks an increasing trend by the government to try to tax fictional amounts as though they were taxable profits. Most recently we have had Diverted Profits Tax (DPT) which looks to tax amounts that the government defines as having been potentially “diverted” from the UK at 25%.

The Bank Surcharge starts its calculation of “profit” with the actual taxable profit to which banks will need to add any group relief that they have received from non-banking entities along with any relief obtained from offsetting brought forward losses thereby resulting in immediate cash outflow to the exchequer.

The result is that banks could effectively be taxed in future in the UK at an amount above 30% on their normal taxable profits on the same day that the Chancellor announced further reductions down to 18% for other companies from 2020. The surcharge will also apply to any CFC charges in the UK in addition to Corporation Tax.

The one positive aspect of the new Bank Surcharge is the announcement that it will be treated as though it were corporation tax so it will be possible to claim Double Taxation Relief (DTR), as opposed to DPT which was designed to avoid being eligible for DTR.

To counter the threat of relocation by international banks headquartered in the UK namely HSBC and Standard Chartered, there is a gradual reduction in the rate of the levy and a change in the scope of bank levy from 1 January 2021, whereby UK headquartered banks are to be levied on their UK balance sheet liabilities (as opposed to worldwide balance sheet which has been the case resulting in much consternation for UK headquartered banks with sizeable international operations). With some banks already publicly considering their position in the UK, these announcements may not prove to be enough to stop the tide of relocation.

Some other banking product related matters

Buy-to-let 
The tax relief on mortgage interest payments will be restricted to the basic rate of tax, ie 20%. Currently property investors can claim tax relief on the interest repayments at the top level of tax they pay, enabling the higher rate payers to claim as much as 45%.

Reforming dividend tax 
The dividend tax credit (which reduces the amount of tax paid on income from shares) will be replaced by a new £5,000 tax-free dividend allowance for all taxpayers from April 2016. Tax rates on dividend income will be increased.

Ending permanent non-dom status 
Non-domiciled individuals (non-doms) live in the UK but consider their permanent home to be elsewhere. The UK rules allow non-doms to pay UK tax on their offshore income only when they bring it into the UK. Permanent non-dom status will be abolished from April 2017. From that date, anyone who’s been resident in the UK for 15 of the past 20 years will be considered UK-domiciled for tax purposes.

Carried interest
Individual members of a partnership involved in investment management for private equity or other investment funds who receive a sum chargeable to capital gains tax (CGT) which is linked to the successful performance of a fund (“carried interest”) will have deductions denied which facilitate a reduced effective rate of tax on such sums which is below the rate of capital gains tax.