UK Budget 2015: new bank tax is flawed, warns IFS
Forcing banks to pay more corporation tax on their profits is not a “well targeted” way to punish lenders that did the most damage to the UK economy or got the biggest bail-outs during the financial crisis, according to the Institute for Fiscal Studies (IFS), reports The Telegraph.
The IFS said the rationale behind justifying an eight per cent corporation tax surcharge for banks, which analysts have said will hit many of Britain’s smaller banks, was flawed.
Stuart Adam, an economist at the IFS, said: “It’s a little hard to see exactly what the rationale is for a higher corporation tax rate on banks, other than a general principle that we want to tax banks heavily in some way. Why design it like this? The bank levy was designed based on an International Monetary Fund (IMF) model with a specific attempt to discourage risky leverage among banks. It has had mixed success in doing that.
“It doesn’t look like it’s well targeted either at those that got the biggest bail-outs in the crisis, or those that pose the highest risk in the future.”
The new levy, which will apply to banks posting profits above £25m from next January, is estimated to hit around 200 UK institutions.
The cost to Britain’s six biggest building societies alone is expected to amount to £630m over the next five years, according to Andy Caton, a director at Yorkshire Building Society.
The Chancellor announced plans in the Budget to reduce the bank levy over the next six years, and restrict it to UK balance sheet liabilities from 2021.
George Osborne claimed the corporation tax levy would “maintain a fair contribution from the banks” and keep the UK a “competitive place to do business”. The changes are expected to raise £1.7bn for the Treasury over the next five years
The boss of Secure Trust, one of the UK’s challenger banks, said there was ” intense frustration” among smaller lenders at the new levy. Paul Lynam said the surcharge would curb ambition and weaken competition on the high street.
Writing in the Telegraph, Mr Lynam said: “Reducing the bank levy but balancing the books by drawing in the whole banking community feels like a rather cynical calculation that targets smaller banks instead.”
While the shake-up is expected to cost the Treasury in the longer term, Mr Adam said it could also distort behaviour. “Corporation tax essentially just discourages making and declaring UK profits,” he said.
The IFS also branded Mr Osborne’s raid on buy-to-let landlords “plain wrong” and said it would push up rents and reduce the availability of housing to renters.
Income tax relief enjoyed by landlords will be cut to the basic rate, which currently stands at 20 per cent. However, Mr Adam said landlords were already taxed more heavily than homeowners who live in their properties and described the Chancellor’s claim that “buy-to-let landlords have a huge advantage in the market” as “nonsense”.
He said: “Restricting mortgage interest relief for landlords makes the playing field less level rather than more. One effect that it is likely to have is that landlords to some extent increase rents and pass some of the tax increase on to tenants rather than take the burden all on themselves.”
It came as the IMF cut its forecast for UK growth in 2015. The Fund now expects the British economy to expand by 2.4 per cent this year, down from a projection of 2.7 per cent three months ago.
