What is a levy?
A levy is effectively a form of tax that only applies to a specific business in a specific activity: in this case banking. The bank levy was originally introduced at 0.05%, but is now planned to be increased from the current 0.078% to 0.088% from January 1 next year.
Rather unusually the levy is not on a bank's assets or revenues, but rather on its debts, including the money a bank owes to other banks and investors. The first £20 billion of a bank's taxable debts are exempt from the levy, as are most deposits from consumers (that is, the money people have in their bank accounts).
Why the new levy on banks?
The levy serves three purposes. The first is simply to raise extra cash for the government, while the second is to discourage banks from carrying out risky borrowing to fund their investment banking (dubbed "casino banking" by critics), with the aim of reducing the likelihood of a 2008 chain reaction of bad debt.
The third purpose is that a £20 billion exemption might encourage some banks to get smaller and thus be less likely to cause an industry-wide shock if anything goes wrong.
The rate is set by the principle that a levy of less than a tenth of one percent will make little difference to the banks in comparative terms, but a big difference to the government's revenues in absolute terms. Last year the levy raised £2.2 billion, which is significant in the context of the government's annual deficit of more than £90 billion. The planned levy increase would raise an extra £220 million a year.
Why are banks complaining?
As with any increase in a tax on high earners and profitable businesses, there is a risk that banks might try to avoid paying more by relocating overseas.
To date no bank has made such a move, but some banks have now publicly stated they will consider a move this year. In those cases there would be little physical movement and branches and services would most likely be unaffected. Instead, the changes would be legal, with banks changing registered offices to avoid additional tax.
Part of the negative view is a belief from some banks that they are particularly unfairly hit by the levy because much of the debt used to calculate payment amounts relate to activities outside the UK. This complaint follows several regarding UK banking rules since 2008, including the policy that banks must keep their retail activities, such as bank accounts and personal loans, completely separate from the bank's own investment branches.
Independent analysts are questioning whether certain banks would go through with relocation, given how hugely profitable the UK marketplace remains. There are also questions about where banks would go. Of the most likely targets, New York has issues over alleged money laundering scandals involving Mexican drug operations; Shanghai would mean dealing with China's political regime; and Hong Kong may be wary about accepting a company that would immediately dominate its economy.
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