City slams tax raid on banks
GEORGE Osborne’s shock move to hike his special tax on banks’ balance sheets was slammed by institutions and economists yesterday. They warned it would exacerbate the uncertainty hanging over the sector, making it harder for banks to budget, and constraining their ability to lend.
The rate hike means the financial sector will have to pay an extra £800m in taxes this year after the chancellor deemed the sector had recovered enough to afford a levy of 0.075 per cent on bank balance sheets. The original plan would have seen the levy set at 0.05 per cent this year, rising to 0.075 per cent in the three successive years of the life of the parliament.
There were fears that the unexpected hike would undermine ongoing talks – dubbed Project Merlin – between the government and HSBC, Barclays, Royal Bank of Scotland and Lloyds, to thrash out a deal to increase their lending to small and medium-sized businesses and possibly to limit the size of bonuses.
But bankers told City A.M. yesterday that the expected peace deal – due to be announced within the next week – remained on track.
“We had ideas of the cost for 2011-2012. It’s just amended our charge this year,” said one bank boss.
“If the view is that this is part of Merlin and that there would not be additional levies or taxes then this could be viewed as a bit of a preemptive strike,” added an industry source.
RBS yesterday confirmed to City A.M. that it had agreed to limit cash bonuses to a maximum of £2,000 as part of Project Merlin. The rest will be paid in equity.
A source close to UKFI, which manages the taxpayers’ shareholding in the bank, said: “There’s a good chance there will be some sort of cash cap, that’s likely, as there was last year.”
However, the British Bankers’ Association slammed Osborne’s move. “Constant chopping and changing” of the tax regime “risks making the UK a less attractive place for businesses to operate,” it warned. Geoffrey Wood at Cass Business School also said the “unpredictability” was “unhelpful”. “It simply makes the conduct of business more difficult, and banks more likely to hold more reserves, instead of lending; makes them be more cautious,” he added.
“At the margin it reduces the profits available to boost banks’ capital, and tends to constrain lending over the medium term,” added Henderson’s Simon Ward. However, he noted that the “fairly modest” amount made the impact “minimal”.