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Roundtable discussion: The Bank Levy

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Four leading tax professionals took part in a Tax Journal roundtable discussion on the Bank Levy. Topics discussed included a review of the consultation process; the extent to which non-banking groups could be caught by the levy; corporate tax and double taxation; the operation of the draft anti-avoidance provisions; the rules on joint and several liability; and the provision for amending the legislation retrospectively. The discussion, which took place before the announcement of the latest increase in the rate, was chaired by Tom Aston, Tax Partner at KPMG.

TA Thank you everybody for your time in participating and preparing for today. We’re going to go through a few points on the Bank Levy, not so much on the policy side because it’s been debated elsewhere, but in terms of how HMRC and taxpayers are going to make the new levy work in practice. Malcolm, if we can start with the consultation process, what is your view on how the engagement between taxpayers and HMRC has worked to date?
MW  I think my general comment is that the consultation has gone as well as reasonably could be expected given the particular circumstances. We’ve got a new tax that’s global in nature – on a balance sheet and not on profits, so it’s quite unique – and we were, let’s be frank, dealing with a sector that’s almost totally in disagreement with the policy. The levy is wide-ranging and very technical in some of the subject areas and we had a June Budget which gave us a short timeframe to initiate the design. And we had to wait for the emerging International Monetary Fund (IMF) conclusions as the government was committed to basing the levy along those lines.
In terms of the actual process I think we’ve shown that HMRC can deliver a new tax, which from our perspective is quite reassuring! I think it’s a good example of how HMRC is trying to adapt to use its large business strategy, with real time working and being collaborative with business in dealing with the issues that ministers give to us. We certainly found, almost unanimously, that those banks and advisers who took part in the consultation were very constructive, understood the time pressures that we were under to deliver the tax, and had an understanding of the joint need to get the design right.
There’s obviously a political element here but as policy people, both ourselves and our counterparts in Treasury needed to design the Levy in a way that was legally robust, while meeting ministers' policy objectives.
We gave the opportunity to people to talk to us and we’ve had over 40 bilateral meetings with banks which included banks that are subsequently, we think, not within the levy, and we’ve had six meetings with representative bodies. We’ve held technical workshops and had the open day and we met with people like the FSA and the Bank of England. Overall we’ve found it a very constructive and very informative process and hopefully we took on board the major concerns where we could, in terms of the detail and understanding, and hopefully the final design reflects that.
TA Andrew, can I ask you to comment as a representative of taxpayers?
AS Clearly there is policy disagreement but the principles of the tax and the intention behind it were set out. HMRC and the Treasury and the business sectors engaged as fellow professionals to thrash the thing out, following the principles that ministers had decided, and in that regard it worked very well because I think HMRC were honest to those principles, and there is some respect in there.
HB To some extent the proof is in the pudding. Some glitches seem to have been fixed and we’ve seen some of the legislation changing to reflect issues that have been raised. So it’s not just talk.
MW Yes, Treasury ministers were trying to introduce this along the lines of their new ‘Tax Policy Making’ principles, so after the initial announcement we had only a short time to get some of the principles out. We appreciated that there was some uncertainty resulting from that, despite our best intentions. The tax policy making process is a new process as well, so the Bank Levy is a bit of a guinea pig in some ways. Hopefully lessons have been learned and now that the annual Budget cycle has established itself now so that if ministers announce a tax on Budget day, HMRC or the Treasury could have a consultation document with more detail at that point and not shortly afterwards.
AS It was challenging for some organisations to know they had to engage, given the short time frame and the complexity. In the AFB Bank Levy Committee, we had to think carefully and put some effort into getting  everybody talking who should have been talking, and I think we managed it.
MW Perhaps that’s a good thing going forward, in that perhaps some of the smaller UK banks will now appreciate that they can come and talk to us, so I think that must be constructive.
TA It’s not necessarily an unwillingness to communicate – a lot of the banks are under a huge amount of pressure from the FSA and lots of other people already, and are stretched for resource internally, so it’s not just a case of ‘won’t communicate’, it’s sometimes ‘can’t communicate’.
MW I think that’s understood, and we tried to be as open as we could, in setting out what was actually happening and making it clear that they could come to us and we’d do our best to help.
Non-banking groups
TA We focused on this as a levy on banking groups but I know there have been concerns from some taxpayers that some non-banking groups could get dragged into it. Two questions on that. Do you think from a policy perspective there is a desire to see significant non-banking groups dragged in if they’ve got banking elements to them, and do you think, given where legislation is now, you’ve now got to a position where everyone is comfortable, in terms of the right people being caught and the wrong people not being caught?
MW We certainly believe that we’ve got to the right position but there is still a period of consultation on the Finance Bill, so if any organisations feel that they should not be caught they should let us know. It’s not our intention to catch the entirety of a non-banking group, we’re looking at the banking subgroup alone. We’ve added the 50% test [in draft paragraph 13] which we feel serves the purpose in carving out some non-banking groups from the definition of banking group, but HMRC are still willing to listen to people who feel that they may or may not be caught. Certainly ministers wanted to focus on banks, but as we learned from the bank payroll tax it’s not always easy to define a bank.
HB Do you have a sense of how many banking groups are likely to be caught by the levy?
MW Our estimates remain as they were. Depending on behavioural response, in the first year, we feel that it’s about 30 to 40.
HB What about non-banking groups?
MW We hope we’ve excluded the non-banking part of those groups, and we feel that there are probably only one or two non-banking groups with a sub-group in them that might be big enough to be in the scope of a charge. The original estimates have proved quite accurate, which is why the rate hasn't changed, but we are much better informed now than we were at the start. That goes down to the openness of people to come to us and explain their problems.
HB Have you had representations and input from non-banking groups as well as from banking groups?
MW We’ve certainly had representations either formally or informally from non-banking groups, and internally with the Large Business Service, about large, non-banking groups with a bank in their group. We’ve discussed the representations and the Customer Relationship Managers have spoken to those groups.
HB If you’ve discussed this with relevant groups, it may be that you’re confident you’ve caught the groups who should be caught and not other ones. One question I had was around the tests in draft paragraph 13. The 90% test excludes a group from being a banking group if at least 90% of its trading income derives from exempt activities (which would include insurance activities). The new 50% test that was added in means that a group is also excluded from being a banking group if at least 50% of its trading income derives from non-financial trading activities. But non-financial trading activities do not include dealing on own account. My understanding is that most insurance activities involve dealing on own account. Does that mean that insurance groups can’t rely on the 50% test, and should be focusing on the 90% test?
MW I think there are other reasons that insurance groups are taken out. There’s obviously the £20 billion allowance, but we have provided two tests, in a sense, to give opportunities that best fitted particular circumstances for certain groups. It was certainly reported that the 50% test was focused on insurers, but I think that’s not entirely correct as it’s probably more focused on non-financial groups. The 90% test is a figure that some feel is quite high, but it was felt it was appropriate. If that is appropriate for insurance groups, then that’s fine. We’re not aware that we’re catching anyone who is not supposed to be caught, but we’re happy to take on board any specific comments.
Corporation tax and double taxation
TA One issue for UK banks is the fact that the Bank Levy is not deductible for corporation tax (CT) purposes. You could take the view that it’s a zero sum game in that if it were deductible, then probably the levy would be set at a higher rate so you’re back to square one. However, there’s not really a level playing field here, given that, say, a US bank may well be able to deduct the levy for  Federal Tax purposes, so its effective Bank Levy cost is potentially significantly lower than the cost for a UK banking group. Is that a desirable policy outcome or could there be flexibility on this point  over time?
AS In an international environment, if there's no consistency between territories, as to whether a levy is deductible, then double taxation really becomes an issue. The playing field is not so much not level, as bumpy in different areas.
MW I think that’s right. We certainly have been told for example that may be deductible in the US. We can’t dictate to the US what they do about our levy. More and more countries are introducing levies, and the treatments are going to be very varied around the world. You’re right, Tom, there is a zero sum game in terms of allowing it against CT given the government’s objective on yield. But then you’ve got subsidiaries of the US banks for example who will be paying their Bank Levy here and who won't be getting CT deductions.
TA In some cases the parent can still potentially get deductions if the subsidiary has checked the box to be treated as a branch for US tax purposes.Also from an outbound perspective there’s nothing to stop a deduction on basic principles in the UK for non-UK levies, and it seems slightly strange to me that if you’re a UK bank you can’t deduct the UK Bank Levy, but you can deduct a foreign levy that looks very similar.
AS If we’re talking about introducing a new tax internationally, based on essentially the same principle, and introducing a double tax regime at the same time, then could it not have been better planned, with a more consistent approach across the piste?
MW That’s an interesting point. I really don’t want to get into the politics too much, but the previous administration was very keen on an internationally agreed levy on the same basis in those countries who introduced it. The government however were very clear that they wanted to introduce a UK unilateral levy, and really it’s ultimately a policy decision. Ministers were very keen that it wasn’t allowable for CT. Indeed, one of the easiest parts for us at HMRC was to draft a line into the legislation to reflect their policy decision. But your point has been well made, and we understand it.
TA The indications we’ve seen so far on double tax relief (DTR) in relation to France are that we’re going to have a new conceptual framework which gives primary taxing rights to the territory of residence, rather than the territory of source. How much of a struggle for HMRC was it to get to that, which is quite a big jump in terms of broad DTR policy?
MW  Once we had a unilaterally designed levy, then it was very obvious that we could run into issues around double tax. That became clear right at the very early stages, once the Chancellor decided on the policy. Different countries are taking different approaches, and some have different policy rationales for their levies than the UK.
We have tried in the legislation to make provision for double taxation relief as wide ranging as possible, with powers so that we can react to treaties updating or exchanges of letters or agreements with other countries, and importantly we have the capability to back date retrospectively to the 1 January.
Could this have been done differently? Conceptually, I think you’re right, Tom, that there’s a range of ways that we could do this. It was almost a twin track approach in that we were aware that the Germans and the French were coming up with levies at the time that we were developing our policy. We had a pretty good understanding of where they were going, and that’s why we’ve ended up where we are, because it best fitted the needs of the UK and French who were most forward in their development. It may be that a different levy in a different country results in a different methodology.
TA So we could in some cases see the UK giving credit for foreign levies in overseas branches?
MW Yes, absolutely, we think the capability is in the legislation to achieve that if, as you point out, the policy approach was along those lines.
HB Is there a timeframe for trying to agree the principles and methodologies with the other countries, or at least with the other countries that have already announced the details of their levies?
MW I think other than as quickly as we physically can, there isn’t a set deadline. Hence the provision in the draft legislation that means we can give relief retrospectively. We are hoping to have draft regulations out on the UK-French double tax soon. And HMRC and Treasury colleagues are talking to other countries. In particular, discussion with Germany are quite advanced. We’re hoping to be able to announce a resolution of some kind there quite quickly as well.
AS Is there any overlap between countries announcing levies, and countries with national guarantee schemes, because for example, in our case, we’ve suffered a cost through contributions to national guarantee schemes that relate to the bailing out of other banks and which is in some respects analogous to the sort of cost that bank levies provide for.  No double tax regime, if it’s just focused on relief for a tax, is going to give us relief for these contributions, even though it is essentially the same type of cost to the Bank as the Bank Levy.
MW Isn’t it really about whether, or not, these levies are also aimed at a resolution and its interesting that to some degree I think it’s a moving target in terms of policy rationales in different countries. We obviously have said that, in policy terms, any double tax relief in terms of our levy will need to relate to an equivalent tax, broadly along IMF proposal lines, and that is balance sheet based. Even within that, we’re going to get detailed questions. Korea has just introduced a levy which may or may not be along the same lines. So there is an interesting policy and HMRC resource issue given the amount of levies that are coming on stream, as to how we actually progress those discussions.
HB It seems to be a policy requirement, or at least a preference, for reciprocity. In other words, we will only give credit for other countries’ levies where credit is given by them for the Bank Levy. Although I noted that there is an ability to agree credit or relief on a unilateral basis, where approved specifically by parliament.
MW That’s right.
HB Am I right to assume that the discussions with other countries are currently proceeding on the basis that there should be reciprocity in each case?
MW That is the case currently for the countries that we’ve been talking to, yes. There are a number of countries that we haven’t as yet had particular discussions with, because they’ve simply announced either ideas or intentions.
HB Is it also fair to assume that France, Germany, the US and some of the bigger European jurisdictions that have announced levies are top of the list?
MW I think that’s fair, yes, and we’ve spoken to all those countries.
Target yield
TA We’ve discussed throughout the birth period of the Bank Levy a magic figure of £2.5 billion as the projected yield for the Bank Levy. If you find that you overshoot or undershoot do you see the levy being recalibrated, or is it in broad terms here to stay?
AS I guess we should also ask the question about sunset clauses. If the levy achieves its target of reducing systemic risk, why at the moment is it not envisaged that it will come to an end?
MW Ultimately it’s a policy decision for ministers. The Chancellor decided that the appropriate amount he wished to see from the banking sector, when the Bank Levy is fully operational, is a ball park £2.5 billion per annum. You’ll see in the documentation issued with the draft Finance Bill that the yield is never exactly £2.5 billion.
There’s a lower introductory rate but the key is for banks to keep the discussions going with ourselves so that when the levy is actually introduced ministers can look at it from a well informed perspective. Going forward, in terms of sunset clauses, there is a commitment by government to review the policy in 2013, although it would require a Finance Bill to change anything. From HMRC’s perspective, our job is to collect the right amount under the legislation. It’s for ministers to decide whether the legislation has solved the problem they wanted to address.
HB It’s worth noting that the levy has already been recalibrated, to some extent, in that the rates in the draft legislation at the moment are higher than the rates originally announced. My assumption was that the change arose in part because the £20 billion figure was originally a threshold and is now an allowance, which means that the way that you raise the tax changes a bit. I would assume that led to the recalibration. Is that a fair assumption, or have other factors gone into that?
MW There are other factors. The original estimates were based largely on published accounts. The most obvious change is the allowance, as you suggest, but there are other design elements that will increase or decrease the yield for a particular bank. That said, it hasn’t changed too much.
HB One of the design elements that seems to have changed is in relation to sovereign repos and high quality liquid assets.
AS That’s one of the things where it seems that there was an exchange of views that changed the design of the tax. The high quality liquid assets exemption came from a realisation that the sovereign debt repo exemption needed to go further, and again it was good to see that the principle of the tax was actually applied consistently. Then it went beyond that, because people then said you can’t have an exemption for an encumbered asset, and then we found that that brought us back to repos. That’s the genesis, as I understand it.
MW Yes.
AS That’s one of the examples of representations working well in practice, and consistency of approach, coming back to the original principle of the tax. Do you have a view on how much change to the yield that brought about? Does it affect many taxpayers significantly?
MW It probably affects a few.
AS My feeling is that it might.
MW Any element of the design could have an impact in terms of the overall distribution, either positively or negatively on particular banks. The original consultation document said we would be excluding sovereign repos. We then moved into an understanding and an acceptance of broader exemption, but then realised that we risked actually removing an exclusion from the levy that we wanted to include in the first place.
The extension to high quality liquid assets, and then the subsequent question of what would be a high quality liquid asset, were almost completely driven by the consultation process. I would say that the original estimates were very much arrived at from a less informed perspective, but the final position hasn’t affected greatly overall yield, although  there are some distributional changes.
AS The most marked distributional change would have been the threshold. That was very challenging for a number of banks.
TA I think it made a lot of sense to make that change, because it takes away what otherwise would have been a very strong incentive for banks not to grow their balance sheets beyond a certain level in the UK.
AS Absolutely, and I think there is consensus amongst the banking community there. Despite the fact that there were winners and losers, I don’t think that anybody felt that we shouldn’t ask for it.
HB Although, it obviously does mean that some of the bigger players are now paying more.
MW Yes, I agree. My understanding of the original threshold was that it was trying not to bring into the Levy the smaller banks, but it could have had some strange behavioural impacts.
TA I think one thing that we can be reasonably sure about is that over the next five years  the banking landscape in the UK is going to change dramatically. It’s quite possibly going to be a new set of banks in different shapes and sizes in five year’s time. Not having the £20 billion cliff edge effect removes a distortion, although there is still a wider issue of the cost to the economy from the fact that banks may no longer bother to make some marginally profitable loans available.
AS It must be said that some of my banking colleagues are of a view that business is won or lost on seven basis points, or 7.5 basis points, and that, as you say Tom, will affect decisions.
HB That brings some of the anti-avoidance rule into focus, because that’s another area where things have changed. The new approach seems to be a form of ‘white list’. The starting point is that, if you do something with a main purpose of avoiding or reducing Bank Levy, it doesn’t have the effect of avoiding or reducing Bank Levy. But then certain things which you can do, which are designed to change your funding profile on an ongoing basis – for example, moving from short term to longer term funding, or moving from longer term funding to equity on an ongoing basis – are disregarded for these purposes. In other words, they still have effect.
There’s probably a bit of uncertainty still around quite how those rules will work, and in particular how those rules will work for banking groups which are involved in restructurings or M&A, because there isn’t a specific process for clearance at the moment. Nor is there very much guidance on how ordinary restructurings might be affected by the anti-avoidance rule. I think at one extreme you might take the example of a branch, where you may have a mobile population of people who move in and out of the branch. This can affect the operation of Bank Levy to the branch – how does the anti-avoidance rule work in that example?
AS It would be ridiculous to have a legacy of having to pretend the branch was there when it wasn’t.
HB In practice, the main purpose test may provide a let out in many cases (ie the anti-avoidance rule won’t apply because the main purpose test is not satisfied) but, as Andrew says, business may be won or lost on 7.5 basis points. So you may very well find that an internal memo discussing a restructuring will say, among various other things, ‘this will affect Bank Levy’. Does that mean you have automatically walked yourself into a problem under the anti-avoidance rules?
MW I’m not the expert on anti-avoidance, but I wouldn’t have thought so if the underlying commercial driver is not tax driven. That’s certainly not the intention, and I’ve actually seen one bank write to us about a restructuring already. That’s absolutely fine because they’re doing it as a commercial transaction.
The policy ambition is to encourage banks to move away from short term funding. Now if that purpose is actually achieved in the ongoing funding profile, then that’s certainly not avoidance. I think the purpose of the test is clear, and hopefully the guidance is also clear on that. The rules are not applied to transactions where tax is not the main purpose. Where banks do respond to the Bank Levy by reducing their ongoing exposure to short term funding, then the anti-avoidance rules shouldn’t start to bite.
I don’t think that we can really get drawn into specifics, because I think it’s going to be on a case-by-case basis but I wouldn’t expect the rule to catch arrangements which have commercial reality or restructurings where people or businesses have actually moved out of the UK. The rule is most obviously targeted at artificial arrangements whose only purpose is to avoid Bank Levy. Certainly we will be providing guidance over the next month or so, with the CRMs, as to how we see this developing.
Joint and several liability
HB Has any thought been given as to whether to mitigate the effect of joint and several liability in an M&A situation? I’m thinking about a scenario involving a small company in a banking group, which gets sold on. If the responsible member later becomes insolvent, the purchasing group may find themselves landed with the whole of the seller group’s Bank Levy.
MW I think the answer is that if that activity is going to happen, then you should discuss it with HMRC quite early on in the process, but certainly I can take that away for us to have a further think about that. And I understand that there is already joint and several liability for VAT groups so there is some precedent for this approach.
Retrospective changes
HB I saw with interest that there is some provision for amending the legislation retrospectively, so presumably if the problems or glitches do emerge as people start to apply the rules in practice there will be some scope to rethink the rules – at least in situations where they’re not meeting the policy objective.
MW Yes, that’s right. Clearly we want to get things right at this stage before it actually becomes law, but the provision to amend retrospectively is there.
TA I think that’s been a very helpful discussion. Thank you, everybody.
Note: this discussion took place before the announcment of the increase in the rate of the Bank Levy. For details of the increase, see the news  report on page 2.
For a detailed KPMG comparison of proposed bank levies in certain overseas jurisdictions, visit
Tom Aston, Tax Partner, KPMG
Helen Buchanan, Tax Partner, Freshfields Bruckhaus Deringer LLP
Andrew Senior, Head of Tax, Rabobank International
Malcolm White, Policy Adviser, HMRC