Labour backs challenger banks in fight against George Osborne’s new tax

Labour has demanded a review of a new tax that hits smaller banks alongside global behemoths

Challenger banks and building societies threatened by George Osborne’s extra bank tax have been offered a lifeline by the Labour Party, which wants to amend the charge to help out the smaller end of the sector.

Smaller lenders have complained that the 8pc corporation tax supplement harms their growth prospects, and takes away valuable resources at a time when the Government had previously been encouraging them to compete with the big banks.

The tax more than makes up for a cut in the bank levy, and effectively shifts some of the tax burden from global giants like HSBC and Standard Chartered on to a wider range of UK lenders.
Labour’s amendment demands that the government review the tax within three months of the Finance Bill passing, and tweak the rules so that smaller banks can be charged a lower rate of tax.

The review should consider “the structure of bank balance sheets; the long-term tax revenue from the banking sector; and competition and diversity within the banking sector”, Labour’s amendment said.

It comes after challenger banks wrote to the Chancellor complaining about the levy. They have secured themselves a meeting with top Treasury officials this week to discuss the tax.

Nationwide’s chief executive Graham Beale wrote in the Telegraph that it was wrong to introduce a tax on banks to make them pay for the damage caused in the financial crisis, and then to apply that to building societies, which did not cause any harm and in fact stepped up lending when damaged banks pulled back.

The Yorkshire Building Society welcomed Labour’s amendment.

“A detailed review of the impact of the new surcharge would be a very welcome move,” said the mutual’s Andy Caton.

“Any truly impartial assessment would conclude that the proposal would have unintended negative consequences on diversity and competition within the sector, and ultimately hurt consumers.”

Meanwhile the tax itself may be much more damaging than was first realised, a new report has suggested.

On the day of the Budget, the Office for Budget Responsibility estimated that the bank tax changes taken together would raise a net £1.6bn for the Treasury over the next five years.

But analysts at EY believe the 8pc surcharge could raise far more than previously expected, leaving the Exchequer potentially £8bn or more better off.

“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,” said EY’s Richard Milnes.

“Almost every change to bank tax policy since the crisis has been made without consultation or detailed impact assessments. It’s clear to us that more work needs to be done to understand how current policy impacts not just the UK banking sector as a whole, but also each of its constituent parts.”