THE Institute of Directors (IoD) has warned the government that plans to introduce a banking levy could drive banking business overseas.
The IoD claimed the tax is a knee-jerk reaction designed to tap into anti-bank sentiment.
It said that the proportionally large UK tax – £2.5bn a year compared to €1.2bn (£1bn) in Germany – risks jeopardising the UK’s position as a premier finance centre. It also criticised taxing institutions which are largely owned by the public.
While the IoD says the proposed levy of £2.5bn a year by 2013 is manageable, it believes it could pave the way for further taxes to be introduced, especially if Labour are voted in at the next election.
The government hopes to avoid companies simply changing their domicile by applying the levy to banks conducting business in the UK. However, the IoD warns that corporation tax revenues would be undermined if companies are forced abroad.
Miles Templeman, director-general of the IoD, said: “There is clearly public concern about how some of the banks have behaved which needs to be addressed, but this should be done in a way that doesn’t encourage the banks to move their headquarters out of the UK.
“There is a risk that the bank levy, as currently designed, will drive banking business away, while doing nothing to reduce the risks that banks pose to the wider economy.”
The IoD also said George Osborne has a mountain to climb on tax competitiveness.
It said the coalition is heading in the right direction on tax policy, but has a “very long way” to go if it wants to stem the exodus of business and attract new investment to the UK.
The UK’s corporation tax rate of 28 per cent means that 18 out of 31 OECD countries have lower rates.