British Chancellor of the Exchequer George Osborne has adopted a policy by stating that he intends to close the loophole that allows banks to use compensation to reduce their tax bills.
The Chancellor has announced that British banks will no longer be allowed to offset costs incurred by paying compensation for mis-selling and market abuse against their tax bills, with the resultant gain in taxation estimated to raise £4.4 billion over the next five years and £5.3 billion by 2020.
On first glance, this appears to be a left-leaning ideology, in which banks will have their corporation tax raised substantially, however it does have conservative undertones in that the taxation rates which banks will pay remain unchanged, and that penalties should be deterrants and not items to be written down as expenses for offsetting against tax liability.
The British Banking Authority does not view this measure with relish, however, stating that Mr. Osborne is “playing politics with the economy.”
Whilst today’s report in the Daily Mail states that some analysts are concerned that banks may relocate their operations overseas, it is quite unlikely that this would occur, as London remains the international center of banking and the largest institutional electronic trading center in the world.
Earlier this month it was announced that the British government had succeeded in staving off calls from the socialist European Commission which had attempted to force relocation of clearing entities from London into the Eurozone if they were handling trades cleared in Euro, a move further bolstering the entire industry’s will to remain in London and reinforcing its importance as a global center for finance, therefore it is unlikely that the measures by Mr. Osborne will have any effect whatsoever with regard to location.
The British financial sector is not subject to the same accountability as its peers in North America, where the National Futures Association often takes firms to court and orders restitution of company funds. Such prolonged investigations and lawsuits are very expensive for companies and the regulatory authorities will often spend a great deal of time going through every record with a fine toothed comb, whereas in the United Kingdom, the Financial Conduct Authority (FCA) simply responds to complaints, issues the financial services firm with an allegation and a tariff which can be settled for a discount of up to 30% if they simply pay before any investigation is conducted, and then the file is closed.
97% of firms in Britain simply pay the discounted amount before any inspections are made, therefore it simply becomes a cost, which the banks have written against earnings, and then it’s business as usual.
Mr Osborne said: “As our banking sector becomes more profitable again, I believe they can make a bigger contribution to the repair of our public finances. The banks got support going into the crisis; now they must support the whole country as we recover from the crisis.”
The move was welcomed last night by politicians who said “ordinary people would be staggered” to learn banks have been able to exploit mis-selling scandals to cut their tax bills.