New Budget measures may harm UK banking

New loss restriction measures outlined in the 2016 Budget could reduce the competitiveness of UK banking.

Under new rules set by the government. it will reduce the amount of profit banks can offset with pre-2015 losses from 50% to 25%, starting 1 April 2016. 

According to banking tax partner at PwC, Peter Mayberry, the resulting effects the new measures would have on competition could mean higher costs. 

“The problem with these measurers is that if you add this with the bank levy then what is effectively happening is that it is reducing the competitiveness of the UK banking business compared to other territories,” he says. 

“This in turn means that the cost of capital for custodian banks in the UK is going to be higher which makes it more expensive for banks to raise capital and provide the services that clients will want.”

The measures may also come as a blow to HSBC following its decision in February to keep its headquarters in London.

HSBC did not respond to comment at the time of publication. 

Mayberry also believes that the UK banking sector may see additional effects of the loss restriction measures as a result of current corporation tax rules. 

“There will be a timing effect as it will take banks longer to use their losses so they will pay more tax in earlier years and arguably less tax in later years when those losses have been used up,” he adds.

“It will also mean that as the corporation tax rate is falling, then if you get relief for losses in a later year that’s at a lower tax rate than the relief in the current year which is at a higher tax rate.”

Other Budget proposals included new interest relief measures capping the amount of relief for interest to 30% of taxable earnings in the UK.

Mayberry suggests that it will be difficult to predict the impact of these new measures as they are not specific to a banking sector. 

“All the material in the budget states that the government will continue to work with the OECD to decide how the rules should apply in a banking context but at the moment it is difficult to predict the outcome.“

Anthony Browne, CEO of the British Bankers Association, also suggested the need for assurances on the implications for the banking sector. 

“The changes to the corporation tax rules on losses – the sixth change to banking taxes in five years – will raise another £2bn over the course of the Parliament, a cumulative effect of £5bn along with previous rules on banking losses. Like every other business, banks want certainty over their tax regime to ensure they can invest for the long-term.”