Bank shares slide amid speculation of ‘ludicrous’ windfall taxes
Chancellor Jeremy Hunt is thought to be weighing up new tax measures in anticipation that high-street banks will report big profits for the year.
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Your support makes all the difference.Shares in the UK’s biggest lenders have slid amid reports that the Chancellor could target banks with higher taxes on their swelling profits.
Upping windfall taxes on the banking sector would be “ludicrous” and further deter international investment into the UK economy, according to markets analyst Michael Hewson of CMC Markets UK.
Chancellor Jeremy Hunt is thought to be weighing up new tax measures in anticipation that high-street banks will report big profits for the year, the Financial Times said.
It seems ludicrous to double down on windfall taxes on a sector that dares to make too much in the way of profit
Higher interest rates mean that lenders could rake in unusually high earnings from customers paying back more on their loans.
But banks are already set to see a third of their profits eaten up by fiscal policy.
Prime Minister Liz Truss last week U-turned on pledges to keep corporation tax at 19% for big companies, instead deciding to lift it to 25% as planned by former Chancellor Rishi Sunak.
The measure is expected to raise around £19 billion for the Government.
For banks, the 25% corporation tax rate sits on top of an 8% surcharge on their profits, which brings the combined tax rate to a third.
The 8% surcharge was kept in place as part of the mini budget, despite Mr Sunak previously promising to reduce it to 3% from April 2023.
City experts have urged the Government to carefully consider the surcharge and the impact of further taxes on the wider economy.
We urge the government to consider the surcharge very carefully and not put at risk the competitiveness of the UK’s banking and finance industry
David Postings, chief executive of trade body UK Finance, said: “We urge the government to consider the surcharge very carefully and not put at risk the competitiveness of the UK’s banking and finance industry, which is the engine of the economy, providing jobs and investment up and down the country.”
The concerns have been echoed by tax experts who point out that other major economies have lower tax demands on the finance sector.
“From my perspective and the banks’ perspective, the competitiveness issue is real”, Richard Milnes, UK banking partner at EY, told the PA news agency.
“All the major banks operating in the UK have choices about where to go and invest, whether that means deciding to grow a desk inside or outside the City.
“The tax rate is relevant to that. It is right that a 33% tax would put the UK at an uncompetitive position relative to Europe and the US.”
Mr Milnes added banks also have an additional levy on their balance sheets, a measure put in place after the financial crisis.
He told PA: “It is inherently uncompetitive because the US does not have it and a similar levy in the EU is due to unwind.
“The Chancellor has lots on his plate over the next few days, but the question is, will he take the time to talk to his officials and understand the decisions that have been made on bank tax?”
Meanwhile, Mr Hewson was more critical of the potential “short-sighted” behaviour of the Chancellor to impose heavier levies on banks when the economy is “crying out” for international investment.
He said: “This comes across as incredibly short-sighted at a time when the government should be looking to encourage investment into the UK economy.
“It is true that banks look set to make higher profits from the rise in interest rates as well as reserves from overnight deposits held overnight at the Bank of England, but they are also likely to have to make further provision for impairments as the UK economy deteriorates over the next 12 months.
“It seems ludicrous to double down on windfall taxes on a sector that dares to make too much in the way of profit.
“It is also an odd way to encourage longer term investment into the UK economy, which is crying out for inward investment.”
Shares in Lloyds Banking Group, the UK’s biggest lender, were down by around 3.5% on Wednesday morning. Fellow British lending giants NatWest and Barclays also saw their share price slip by about 1.5% following the reports.
The Treasury is due to announce what will happen to the bank surcharge when its medium-term fiscal plan is unveiled on October 31.