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Banks’ corporation tax bill reduced by half

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HMRC collected corporation tax of £3.5bn in 2010/11 from the UK banking sector – half the amount collected in 2006/07. Banking specialists told Tax Journal that the figures should not come as a surprise, given the scale of recent losses which banks are entitled to set against future profits.

HMRC’s figures, set out in Pay As You Earn and Corporation Tax receipts from the banking sector, exclude the bank levy, bank payroll tax, irrecoverable VAT and other taxes.

The sector accounted for £17.5bn in PAYE tax and employee and employer NICs in 2010/11, boosted by ‘relatively large’ bonus payments.

►'The fall in the corporation tax take from banks cannot come as a shock to anyone'

Kevin Cummings

The British Bankers' Association said it would be ‘more appropriate for HMRC to publish a more comprehensive picture of the very significant contribution banks make to the Exchequer’. The permanent bank levy will raise over £2.5bn a year.

A survey of 17 of the largest BBA members showed that those banks were contributing ‘some £3bn’ of irrecoverable VAT, a BBA spokesman told Tax Journal.

HMRC said PAYE and corporation tax receipts from the sector rose by 21% to £21bn between 2009/10 and 2010/11. But the global financial crisis in 2008 and the associated economic downturn were reflected in a 23% fall in receipts from 2007/08 to 2008/09.

‘Corporation tax receipts reached £7.3bn in 2006/07 but then fell year-on-year in 2007/08, 2008/09 and 2009/10, HMRC said. ‘In all, between 2006/07 and 2009/10 there was a reduction of 71%. Corporation tax receipts recovered somewhat in 2010/11 to £3.5bn, or 48% of their 2006/07 peak.’

Losses brought forward

The UK government was asked in July to estimate the amount of corporation tax ‘that will not be paid in 2011/12 by banks taxable in the UK as a result of prior year losses brought forward’.

Lord Sassoon, the Commercial Secretary to the Treasury, told Lord Myners that the Office for Budget Responsibility did not publish a sectoral breakdown for trading losses brought forward, ‘due to concerns about the robustness of projections at such a level’.

The HMRC release coincided with an OECD report noting that ‘due to the recent financial and economic crisis, the amount of global corporate losses is enormous’.

But he referred Lord Myners to an OBR forecast for trading losses brought forward and used by all companies. The OBR estimated in March that £25bn of losses would be used in 2010/11.

The BBA’s spokesman observed that ‘UK tax law recognises that companies – as well as individuals carrying on business – can from time to time make a loss and allows this to be carried forward against future profits.  This applies just as much to any other business as it does banks.’

Earlier this year The Guardian reported that George Osborne had ‘shelved plans’ to ‘prevent banks from offsetting all their losses from the financial crisis against tax’.

Some people might regard relief for losses brought forward as a second bail-out of the banks, Faisal Islam, Economics Editor at Channel 4 News, suggested in an interview with Stephen Hester, RBS Chief Executive, in February.

Hester said there was ‘no business in the country’ that would not carry forward losses against future profits: ‘There is a little bit of wanting cake and eating it in this debate.’

‘Enormous’ global corporate losses

HMRC’s commentary said little about tax reliefs for trading losses, but did say that group relief – enabling companies in a group to surrender losses to other group companies – was ‘particularly significant’.

The HMRC release coincided with an OECD report noting that ‘due to the recent financial and economic crisis, the amount of global corporate losses is enormous’.

The numbers  are ‘vast, with loss carry-forwards as high as 25% of GDP in some countries,’ said the OECD report examining corporation tax losses across all industry sectors in 17 countries.

‘Though most of these claims are justified, some corporations find loop-holes and use “aggressive tax planning” to avoid taxes in ways that are not within the spirit of the law,’ the OECD said in Corporate Loss Utilisation through Aggressive Tax Planning.

‘The complexity of country rules regarding losses, and the potential opportunities for taxpayers to exploit differences among countries rules through aggressive tax planning, are themselves a source of tax risk,’ it added.

A function of our tax system

Kevin Cummings

Partner, Berwin Leighton Paisner LLP

'What is perhaps most telling about the HMRC release, is certainly not the statistics themselves – rather, that it is the first publication of its kind in targeting a particular sector, heaping further implied pressure on the banks, and the banks alone.

'The fall in the corporation tax take from banks cannot come as a shock to anyone, given the losses sustained since 2008. Now that banks seem to be back in profit, the utilisation of carry forward losses is a function of our tax system and it is hoped that their use does not re-open the debate on legislative loss curtailment or voluntary disclaimer.

'We all know that mobile units within the financial sector have left the UK in recent years because of a sense of over-taxation and over-regulation. The figures, sadly, do not show the decline in financial activity due to those departures or institutions choosing, where possible, to shift new or existing business from London.'

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