Winston Churchill famously claimed that “for a nation to try to tax itself into prosperity is like a man standing in a bucket and trying to lift himself up by the handle”. But for banking – Britain’s biggest export sector – the handle is still being pulled.
New figures published today by the BBA show that banks contributed £34.2bn to the public coffers in the year to 31 March 2016. This is almost four times the combined cost of putting on the 2012 Olympic and Paralympic Games.
Banks are committed to paying their fair share. The sector’s contribution finances a healthy chunk of our public services, which is welcome especially when the economic outlook is uncertain.
However, the UK needs to do more to ensure it remains competitive as a world-leading international banking centre after Brexit.
Banks have been singled out for five sector-specific tax measures since 2010. The tax take from the sector is now at its highest level since 2006, at a time when revenues are under increasing pressure. Punitive bank-specific taxes also risk pushing activity to less regulated and less taxed sectors – actually reducing tax take.
Our rivals are also striving to take banking jobs – as well as the tax revenues they generate – away from our shores. French Prime Minister Manuel Valls last week pledged to reduce his country’s corporation tax rate from 33 per cent to 28 per cent by 2020.
Banks in the UK now pay corporation tax at a rate of 28 per cent, while every other company pays 20 per cent. This is due to an 8 per cent surcharge on bank profits starting this year.
The additional revenues from the surcharge will not be reflected until next year’s survey, but even without them, corporation tax receipts climbed to £3.2bn, double the level of two years ago. This increase was driven by bank-specific restrictions on loss relief and deductibility of compensation payments.
For any industry, tax is a business cost and, in the same way as any other cost, certainty and predictability are key. But for banks, the problem of sector-specific taxes has been made worse by how unpredictable the changes have been.
The bank levy, for example, has been increased nine times since its introduction in 2011. This pushed receipts from the levy to £3.4bn in 2016, up 54 per cent on the 2014 total. The government announced last summer that the levy is to be reduced gradually but imposed the bank surcharge at the same time.
It is more important than ever that the UK remains a competitive place to do business for both domestic and foreign banks, with a proportionate and stable tax environment.
This might sound like something only of interest to those who work in the City. But the implications for the rest of the country are very real. Banks employ over half a million people right across the UK, two thirds of whom are based outside London.
Regulatory requirements placed on banks, including the amount of capital they must hold against their lending, are substantially more demanding since the financial crisis and will continue to be.
Taxing banks too heavily, however, threatens the jobs they create, the lending they provide, and ultimately the money our public services need. In Brexit Britain, Churchill’s words could not be more prescient.