The fine print of George Osborne’s Budget last month increased the range of debt that banks are allowed to claim tax credits over, which the Treasury hopes will bolster the amounts they keep in reserve.
Previously, banks were able to offset corporation tax payments with a credit equal to interest payments on “Tier 2” debt – borrowing with less strict rules regarding repayments in the event of liquidation or bankruptcy.
However, now banks will be able to claim on interest paid on more secure Tier 1 debt, which includes instruments such as government bonds. Banks are being encouraged to raise more Tier 1 capital and last week Bank of England governor Sir Mervyn King warned that Britain’s biggest banks have a £25bn capital shortage.
The proposals were not announced in George Osborne’s Budget speech nor included in the costing of the Budget, since they have not yet been legislated for. Therefore it is unclear how much the tax relief will affect the nation’s finances.