Bank tax will raise twice government estimate at £12bn

George Osborne

In the summer budget, George Osborne announced plans to replace the existing levy on bank balance sheets with an 8 per cent surcharge on their profits of more than £25 million, pledging to ensure that Britain remains a “highly attractive” place for them to be based, reports The Times.

The Treasury has said it expects the levy to raise about £6 billion over the current parliament. However, a report published by EY yesterday suggested this figure was “vastly understated” and said the true amount could be far higher, because of the inherently conservative methodology used by the Treasury to draw it up.

Richard Milnes, a partner at EY, said using a different, “more realistic” methodology demonstrated that the surcharge is likely to raise a much higher amount.

“We are confident it could well be double that, when you take into account the whole market . . . It could be even higher.”

Mr Milnes said the Treasury and the Office for Budget Responsibility had based its £6 billion estimate on standard assumptions regarding macroeconomic growth and bank profitability over the past five years — a period stretching back to the depths of the financial crisis.

At the time, GDP growth was non-existent or insipid while many banks were undergoing intensive restructuring and deleveraging, earning far smaller profits than usual.

He said the EY estimates were based on more current market conditions, reflecting improvements in the economy and in the performance of the banking sector.

Several British banks are preparing to air their concerns about the impact of the surcharge at a meeting this week with the Treasury.

Mr Milnes said EY had drawn up the revised estimates because it had received repeated queries from banking clients questioning the assumptions made by the Treasury in drawing up the £6 billion estimate.

He said: “There’s been an acceptance by the banking sector that the political reality post-financial-crisis was going to bring a more punitive tax regime. However, the last 12 months has been a sustained assault on banks’ tax positions.”

A spokesman for the British Bankers’ Association said: “We welcomed the chancellor’s decision to amend the bank levy to reduce the damage it does to Britain’s biggest export industry. However, introducing yet another new bank-specific tax will reinforce fears that Britain is becoming a less attractive place for banks to do business. This is the fifth new bank-specific tax measure in as many years. We all want banks to take decisions for the long term. More industry-specific taxes create a climate of uncertainty that makes it harder for banks to take the decisions that create jobs and benefit customers.”