How will spending review impact banking jobs in London?
Last month, Chancellor George Osborne unveiled the government's Comprehensive Spending Review, confirming a wide range of fiscal changes across the country, including the imposition of a permanent levy on banks.
Those with banking jobs in London have now learnt that the Treasury is hopeful it will raise £2.5 billion per year by imposing the tax on the financial services sector. "It is only right that, during difficult times, steps are taken to ensure that the banks make a full and fair contribution," the Treasury explained.
Commenting on the reasons behind his decision, Mr Osborne said: "We neither want to let banks off making their fair contribution, nor do we want to drive them abroad. Our aim will be to extract the maximum sustainable tax revenues from financial services." He added that the Treasury will assess what these maximum revenues could be over a period of years.
Mr Osborne's comments make clear that the coalition government is keen not to see the UK's financial services hub in London moving abroad in order to avoid paying the tax. Indeed, according to the Guardian, some of the City's largest banks could stand to make a gain as a result of the planned cuts to corporation tax set to be brought in over the next four years.
Corporation tax is to be reduced from 28 per cent to 24 per cent which may help to offset the levy once it is introduced in January next year. As a result of this, the newspaper points out that banks backed by the state - such as Royal Bank of Scotland and Lloyds TSB - may stand to make gains under the new environment. Trades Union Congress general secretary Brendan Barber says that this is because financial services providers are carrying forward £19 billion of tax losses to offset against future bills. He adds that in the case of state-backed banks, these are losses that have been bailed out by the taxpayer.
During its first year, the tax will see a charge of 0.04 per cent placed on banks' balance sheets, before increasing to 0.07 per cent in 2012-13 in order to ultimately generate £2.5 billion annually by 2013-14, although the Treasury revealed that it has not yet agreed on the rate at which the tax will be implemented.
Insurance providers may miss out on being charged under the changes, due to alterations in the definition of the term "banking group". As a result, an organisation will not be classified as a bank if more than half of its activities are demonstrably non-financial. Under these conditions, it would appear that the government is keen not to cause significant damage to the capital's current status as one of the world's leading financial centres.
City minister Mark Hoban said that in imposing the tax, the government has acknowledged the potential risks banks pose to both the economy and the financial system. He added that the thinking behind the levy is to encourage less risk taking, while also seeking to improve regulatory standards and ensure greater fiscal security.
"It will apply to the global balance sheets of UK banks and the UK operations of banks from other countries," Mr Hoban explained. However, some financial services providers are now concerned about the possibility of being double taxed in the event that a similar duty is set in other countries, amid worries that the UK will not meet an agreement with other nations ahead of January.
The spending review also confirmed that all UK banks will have to sign up to a tax code of conduct by the end of November, although the Independent reports that, so far, four out of 15 financial services providers have done this. Under the scheme, banks must pledge not to create avoidance schemes in an effort to reduce their own or their clients' bills.
Commenting on the spending review as a whole, the British Bankers' Association said: "We are pleased the chancellor said he wishes to balance taxation with the attractiveness of the UK as a global financial centre and the need to retain jobs."
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