Britain’s banking industry is going on the offensive to campaign for lower taxes as the risks increase of a disruptive Brexit and a high-tax Corbyn government.
In a report published on Wednesday, UK Finance, the lobby group for the sector, said the tax burden for banks operating out of London was now running at more than 50 per cent of profits, twice the prevailing rate in low-tax international centres such as Singapore and Dubai.
“This is not necessarily to plead we are overtaxed,” said Stephen Jones, UK Finance chief executive. “But in the context of Brexit and a potential Labour government, it’s a warning if you milk the golden goose too much, you’ll risking losing it.”
The UK’s corporation tax rate, currently 19 per cent, is inflated for banks by an 8 per cent surcharge. There is also a bank levy in place that is dependent on balance sheet size.
Adding in social security contributions, property taxes and unrecoverable value added tax yields a total tax burden of 50.6 per cent of “commercial profit”, according to PwC, which compiled the figures. Commercial profit is defined as pre-tax profit plus all of the above taxes added back.
The comparable burden for banks operating in Frankfurt is 43.8 per cent and in New York it is 34.2 per cent. Both Singapore and Dubai have total tax rates below 25 per cent, according to PwC.
Aside from profit taxes, employers’ social security contributions, accounting for 16 per cent of the total tax rate, are the biggest factor behind London’s big tax burden. They are uncapped relative to employees’ pay in the UK, making them four times the size of the Frankfurt equivalent, despite Germany’s reputation as a country with high labour costs.
In 2018, the UK banking sector contributed £36.7bn to HMRC, according to PwC. That is equivalent to 5.4 per cent of total taxes raised in the UK.
The UK banking sector faces significant disruption from Brexit. Aside from the large British banks, the lion’s share of the tax take comes from international banks operating out of London, in many cases using the City as a hub from which they conduct their pan-European operations.
In the event of a no-deal Brexit, they will be forced to relocate their business with EU27 clients to a rival EU financial centre, such as Frankfurt, Paris or Dublin.
Banks have spent the past two years setting up structures in those locations in preparation, while hoping that a deal would limit the volume of business that would have to be relocated.
City financiers are just as worried about the risks of a Labour government under Jeremy Corbyn, not least from the point of view of what it would mean for taxes.
According to a new poll of more than 700 investors by stockbroker AJ Bell, the fear of a Corbyn government was the biggest worry for 2019 for 28 per cent of respondents; 34 per cent cited Brexit as the number one risk.
Reflecting these concerns, half of investors have been stockpiling cash in their portfolio, fearing a crash, the poll showed, while two in five are braced for a stock market dip around the March 29 Brexit date.
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