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Government sets out bank levy proposals

 

Whilst the main rate of the levy has yet to be confirmed, the Government have repeated that they intend to raise £2.5billion from the bank levy from 2012 (although the amount raised may be lower in 2011). In the absence of a rate for the levy, individual banking groups are not yet able to calculate their anticipated exposure.

The detailed rules for the bank levy are largely as expected. The Government has made some concessions in light of the consultation and workshops held over the summer. However, a number of fundamental issues are yet to be resolved. Although the Government have made much of the need for a simple regime, the draft legislation is detailed, complex, and will be challenging for those required to apply the new rules in practice.

The new bank levy at a glance

The bank levy is intended to incentivise banking groups to move away from risky funding profiles and will apply from 1 January 2011. It is targeted at the larger UK banks and banking groups (and building societies) and UK branches and subsidiaries of foreign banks or banking groups operating in the UK. For UK banks, the bank levy will be charged on their world-wide "chargeable equity and liabilities" as shown in the consolidated accounts. For non-UK banks, the scope of the bank levy is limited to chargeable equity and liabilities attributable to UK operations. The definitions of banks and banking groups for the bank levy are based on the definitions used for the earlier bank payroll tax, but with some modifications. The bank levy also applies to building society groups and non-banking groups with some banking activity. There are different rules for groups and for stand alone entities.

The bank levy is calculated by reference to the total liabilities and equity of the institution or banking group identified in the relevant accounts in excess of £20 billion. Originally, this figure was intended to be a threshold. In response to comments made during the consultation that an "all or nothing" threshold might distort behaviour or encourage avoidance to fall below the threshold, the Government has agreed to include an allowance. This will provide that the first £20 billion of equity and liabilities will not be subject to the bank levy. However, equity and liabilities covered by the allowance must be allocated between short term and long term equity liabilities. Although building societies are within the scope of the bank levy, in practice the £20 billion allowance should mean that few are caught. The bank levy is not deductible for mainstream corporation tax purposes. Some notable exclusions and deductions from the bank levy are mentioned below.

There are two rates for the bank levy. The main rate will apply to short term liabilities and a half rate will apply to equities and long term liabilities. Although the rate of the bank levy has yet to be set, in establishing the rates the Government will take into account its expectation that £2.5 billion will be raised from the bank levy in each year from 2012, and that concessions have been made such as introducing the £20 billion allowance. The main rate of 0.04% (for 2011) and 0.07% (for 2012) as previously announced (with half rates for long term liabilities) may therefore be adjusted to take these factors into account.

Tax base – exclusions and deductions

Certain equity and liabilities are excluded when calculating the chargeable base for the bank levy.

Tier 1 capital

Although Tier 1 capital is excluded, Tier 2 capital is not. Instead Tier 2 attracts the half rate as a long term liability (see above). Helpfully, the Government has stated that this exclusion will be kept under review in the light of regulatory developments, in particular the present Basel consultation on contingent capital.

Liabilities which can be net settled

Certain net settled liabilities are excluded. The original proposal was only to exclude netting arrangements governed by a master netting agreement. However, this will now be extended to other arrangements where netting is legally enforceable. Helpfully, the netting exclusion has been extended beyond derivatives and will also cover, for example, loans, credit balances and repos.

Deposits

Deposits backed by the Financial Services Compensation Scheme (or equivalent foreign rules) are excluded from the calculation of liabilities. Other deposits are subject to the rate of bank levy for long term liabilities.

Other liabilities

Certain narrowly defined liabilities are excluded. These include payments due under the Financial Services Compensation Scheme (and similar overseas schemes), retail insurance policyholder liabilities, property, plant and machinery revaluation reserves, provisions for current and deferred tax liabilities (including the bank levy itself) and certain pensions liabilities. There appears to be no particular logic to this list and a bank's balance sheet is likely to contain a variety of other liabilities (for example, trade debts, rent or service charges) which will still be taken into account in determining the amount of the levy that is due.

High-quality liquid assets

The chargeable amount can be reduced further by deducting high-quality liquid assets which would qualify for the FSA liquidity buffer. As banks are required to maintain this buffer and receive low yields on the assets, the Government have conceded that these assets should be deductible when computing the bank levy. This replaces the previously proposed exemption for repos secured on sovereign debt.

Non banking groups

The definitions of bank, banking group and non-banking group are based on the earlier bank payroll tax definitions with some changes. These definitions (in theory) allow groups with minimal banking activity to be caught by the bank levy. However, there is a similar exclusion to the payroll tax 90% exempt activities test. This exclusion is intended to apply so that groups with at least 90% trading activity derived from insurance, asset management and related activity are not subject to the bank levy. The bank levy exempt activities test also excludes groups with at least 50% trading activity derived from "non-financial trading activities". Although it might be thought that these exclusions should apply to take non-banking groups outside the scope of the bank levy, as currently drafted the exempt activities tests appears only to apply to banking groups. There does not seem to be any logic to this, and it is hoped that this anomaly can be put right as part of the ongoing consultation. It is also not possible to exclude a stand alone entity on the basis of these tests, even if it has, for example, 90% exempt activities.

Non UK banking groups

In the case of foreign banks and banking groups operating in the UK through branches and/or subsidiaries, the legislation requires an aggregation of the relevant liabilities and equity in respect of all UK branches and/or subsidiaries. These groups face a complicated calculation of the bank levy each year. As part of this calculation, the Government has approved the Capital Attribution Tax Adjustment (CATA) method to attribute assets to the branch. To try to simplify the calculations for non-UK banking groups (and for non-banking groups) there is now a de minimis exclusion for a subsidiary which has liabilities less than £50m (but not more than £200m in aggregate across the group for each chargeable period). It is not clear, however, why the de minimis exclusions do not apply for UK banking groups or stand alone entities.
The original consultation on the bank levy also proposed that for non-UK banking groups, a UK subsidiary with sufficient standing to meet the bank levy would need to be responsible for compliance and payment obligations. There is no further detail on this in the draft legislation, and it is not entirely clear how a non-UK banking group with only a UK branch would comply with these requirements.

Anti-avoidance

As expected there is a targeted anti avoidance rule (TAAR) designed to stop groups entering into transactions or arrangements the main purpose of which would be to reduce the bank levy. Transactions which genuinely change the funding profile or which move funding towards long term liabilities or exempt liabilities are not intended to be caught. This is achieved by an exemption from the TAAR, but only where HMRC is satisfied that this is the effect of the arrangements. A subjective test based on HMRC's views of the arrangements makes this TAAR a highly unusual anti-avoidance provision, and one which appears to give significant discretion to HMRC. No doubt this will be raised in the next round of consultation.

Double tax relief

The concern remains that banking groups operating in more than one jurisdiction will remain exposed to double tax in respect of the UK's bank levy and an equivalent non-UK levy. Depending on how the other jurisdiction imposes its levy, this could impact both UK banking groups and non-UK banking groups. There is still no news on the Government's stated aim of trying to resolve double tax through amending double taxation agreements. The draft legislation does, however, allow the Government to act unilaterally to relieve double taxation through making regulations in relation to a particular foreign levy. It is interesting to note that the Government has introduced anti-avoidance in this area before agreeing any amendments to double tax treaties with other relevant jurisdictions.

Conclusion

While the Government has adopted a number of recommendations made during the consultation, there remain significant areas of uncertainty. Most importantly the rate of the bank levy has yet to be set. Banks faced with the bank levy from 1 January 2011 will also want to see the detail on compliance and to understand the position on double tax. The draft legislation is complex, and the exemptions and exclusions are not applied consistently to banking and non-banking groups and stand alone entities. Given the 1 January 2011 start date, there is little time left for banks to come to terms with the complexities of the new regime.

The Government are seeking comments on the draft legislation by 19 November. The final draft legislation will be issued before the end of the year.
Click here for a link to HM Treasury's Bank Levy website.

 

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