UK Bank Levy: UK Publishes Draft Legislation for its New Tax on Banks

Sullivan & Cromwell LLP - November 10, 2010

In his Budget statement delivered on 22 June, 2010, the Chancellor of the Exchequer announced that the UK will introduce a tax based on banks’ balance sheets from 1 January, 2011, to be known as “bank levy”. Once fully in place this tax is expected to generate around £2.5 billion annually. Further detailed draft legislation and accompanying guidance have been recently published, setting out in detail how the bank levy will operate.

The tax will apply to both UK-headed banks and to non-UK headed bank groups with operations in the UK.  In particular, the tax will apply to: (1) the global consolidated balance sheet of UK banking groups and building societies; (2) the aggregated UK subsidiary, UK sub group and UK branch balance sheets of non-UK banking groups; and (3) the balance sheets of UK banks, UK bank branches and UK bank sub groups in non-banking groups.

Once the relevant balance sheet has been identified, the tax will be calculated annually as a percentage of the total equity and liabilities shown on the relevant balance sheet excluding in particular:  (1) Tier 1 capital; (2) insured deposits; (3) policyholder liabilities of insurance business within banking groups; and (4) certain tax and pension fund liabilities. Some adjustments to balance sheets may be required in order to net certain assets and liabilities e.g. cash-collateralised derivatives.  It was initially proposed that the percentage rate of levy would be 0.07%, with a lower rate of 0.04% for 2011.  Funding liabilities of greater than one-year maturity and certain uninsured deposits would be charged at half the rate otherwise applicable.  A final decision on rates will be announced towards the end of 2010, and rates may rise above the rates originally proposed.  The proposed rates are in any case significantly higher than the rate to be imposed under the French bank levy.

The tax will not be covered by the UK’s existing double taxation treaties. The government has begun discussions with other countries that are introducing similar taxes (France and Germany have committed to introduce similar taxes) to avoid double taxation issues arising because of such taxes.