Banks to pay balance sheet tax

Britain's banks will be hit with a balance sheet tax to raise more than £2 billion a year, the Chancellor announced today.

The bank levy will come into force next January and will help the sector play its part in shrinking the UK's deficit after being bailed out with taxpayer cash during the financial crisis.

George Osborne's plans will force banks to pay a tax based on their net worth - seen more as a tax on risk, rather than profits.

The tax comes as part of a joint move by the UK, France and Germany - with Britain's European counterparts also announcing levies on bank balance sheets today.

Similar plans are likewise currently going through the US Senate, although Mr Osborne said the UK would continue working with the G20 nations to develop a wider international bank levy on bank activities, such as profits.

The bank levy will be charged at a lower rate of 0.04% in the first year - generating an expected £1.15 billion, rising to 0.07% or £2.3 billion in 2012/13 and up to £2.5 billion in 2013/14.

The British Bankers' Association (BBA) warned the tax could make the UK banking sector less competitive and called for greater co-ordination globally so that banks do not pay multiple taxes in different countries.

But bank shares lifted as the tax blow was not as bad as some feared, with many experts bracing for a revenues target of £3 billion or more.

Part-nationalised Lloyds Banking Group rose as much as 4%, while fellow taxpayer-backed Royal Bank of Scotland gained 1%.

Those with more international operations suffered as today's joint announcements with France and Germany signalled multiple levies. Barclays fell 2% and HSBC was also in the red.

The Chancellor said the incoming UK balance sheet would apply to banks and building societies, as well as foreign banks with UK operations.

It will not apply to those with balance sheets of less than £20 billion.

The tax will also not take into account various liabilities, such as core capital strength reserves and insured retail deposits.

Mr Osborne said: "This was a crisis that started in the banking sector and the failures of banks imposed a huge cost on the rest of society.

"Banks should make an appropriate contribution which reflects the many risks that they generate."

The Treasury will now consult on the tax over the summer, with final details due later this year.

France will outline its proposals in its forthcoming Budget, while Germany is set to present draft legislation later this summer.

It is not yet clear if banks with operations in each country will need to pay a tax on their balance sheet in each respective jurisdiction.

The Treasury said: "All three levies will aim to ensure that banks make a fair contribution to reflect the risks they pose to the financial system and wider economy, and to encourage banks to adjust their balance sheets to reduce this risk."

The BBA urged the Treasury to "ensure bank taxes do not hurt our national interests or provide an unfair advantage for other businesses operating here".

It added: "It is essential that the international banks do not find themselves taxed multiple times for the same thing."

Peter Maybrey, financial services tax partner at PricewaterhouseCoopers, said it was risky introducing a bank levy before other major financial centres.

He said: "Other territories, whose banks have not been as adversely affected in the financial crisis, are likely to resist bringing in a similar levy.

"Canada, Australia, Japan and Switzerland may fall into this category. This could lead to a migration of business activity from the UK to such other territories which either do not impose a levy or impose one at a lower rate than the UK."

The levy follows the one-off UK bonus tax imposed by the previous Government, which charged 50% on all windfalls above £25,000.

This raised more than £2 billion since being introduced ahead of this year's bonus season.

There are further fears in the industry over the impact on banks at a time when they are also being urged to lend more to hard-up businesses and individuals.

The BBA estimates the financial sector already pays the Exchequer around £61 billion in other revenues.