Was Osborne's tax bank raid justified?
STARTING an article which advocates a level of sympathy for the nation's banks could result in some readers suffering unnecessary indigestion as they tuck into their cereal this morning, so perhaps 'sympathy' is the wrong choice of word. 'Caution' might be a more appropriate option as we consider whether last week's Budget hastened the point at which the golden egg-producing banking goose moved closer to shuffling off this mortal coil, in the hybrid taxation sense at least.
As the Chancellor announced last week that banks will be forced to cough up an additional PS2 billion in tax following his decision to further reduce their collective ability to offset profits against earlier losses when calculating corporation tax payments, few taxpaying citizens were reduced to tears.
Two years ago, Mr Osborne cut banks' loss relief from 100 per cent to 50 per cent, a move that encountered little in the way of opposition from the electorate, particularly as it effectively raised PS4 billion. Last week, the relief was slashed again, which means that banks will now be able to offset only 25 per cent of earlier losses against current profits.
The decision will hit two banks in which taxpayers hold a significant stake more than others. RBS, which has lost more than PS50 billion since 2008, and Lloyds Banking Group, in which taxpayers retain a 9 per cent stake (Mr Osborne hopes to offload this share within 12 months) will bear the brunt of the offsetting edict, making them potentially less attractive to investors.
Of course, it could be argued, rightly, that these measures have a relatively short life. Once banks return to sustained profitability, their ability to offset losses of any description will diminish over time as their red ink-splattered final accounts become a distant memory. However, sceptics might argue that once provision has been made to raise regular (and increasing) taxes from a particular sector, no Chancellor will ever willingly give them up. Economic historians will recall it was Robert Peel's government that first introduced a (non-wartime) income tax on individuals earning more than PS150 a year as a 'temporary measure'; it's been with us ever since because the Income Tax Act of 1842 didn't define how long 'temporary' should be, although 174 years seems a tad excessive.
The point is: that if banks are considered an 'easy touch' by current and future cash-strapped Chancellors, desperate for an extra several billion pounds, there's every likelihood that even when (not if) the sector returns to yielding significant profits, the taxes will continue to be raised under a different name. And while bankers were rightly criticised - and in some instances (though not enough) jailed - for their collective incompetence which caused the financial crisis eight years ago, we should be careful not to undermine a sector that contributes a significant amount to the economy's health.
Following Mr Osborne's Budget, bankers were muted in their response. "Banks contributed PS31.3 billion to Treasury coffers in 2014," said Anthony Browne, head of the British Bankers' Association (BBA), who added: "The changes to the corporation tax rules on losses are the sixth change to banking taxes in five years." It seems likely that Mr Browne has received few letters of support, but do his figures stack up? According to a report published by the BBA covering an estimated 92 per cent of the UK banking sector, the total tax contribution in 2014 was PS31.3 billion, or 5.5 per cent of the Government's total tax receipts.
Bankers argue that although corporation tax has fallen, there has been a corresponding increase in irrecoverable VAT, employer NIC and the bank levy. The introduction of a one-off bank payroll tax, a bank levy and increases in the rate of NIC and VAT have, they maintain, comfortably offset the Treasury's falling corporation tax receipts over the past eight years. Again, the sector will garner little in the way of support for such an argument; indeed, a sizeable number of taxpayers will probably be delighted to learn that banks are getting hammered, tax-wise, although long after the horse has disappeared through a wide-open barn door.
Yet the BBA study found that the banking sector currently employs 425,000 workers, or around 1.5 per cent of the UK workforce. However, according to Treasury figures, employment taxes borne and collected from these workers totalled PS17.6 billion in 2014, or 7.2 per cent of aggregate UK employment taxes.
In other words, for every employee working in the banking sector, average employment taxes of PS35,278 were paid to the Treasury. This is approximately four times larger than the equivalent payment based on the national average wage.
The BBA acknowledges that the banking levy will eventually fall, although corporation tax payments are set to increase significantly, reflecting, the body says, "the impact of the loss restriction, non-deductibility of compensation payments, a return to profitability and the introduction of the corporation tax surcharge."
Their report concludes by saying that there is merit in "continuing to monitor the tax contributions by the banks in the context of the overall contribution to the UK economy".
This seems reasonable, not least because the nation's financial services sector, of which banking is the most significant element, contributes more than PS51 billion a year to the Treasury.
Chancellors who continue to consider the sector an easy touch may find that at some point, the number of banks they can hit with hybrid taxes begins to fall.
The changes to the corporation tax rules on losses are the sixth change to banking taxes in five years