Summer Budget 2015
Bank corporation tax surcharge
The recent UK Summer Budget introduced an 8% supplementary tax surcharge on bank profits, which will apply from 1 January 2016. The tax will apply to banks’ corporation tax profit before the use of any existing carried forward losses and group relief from nonbanking companies. The tax will not apply to the first £25mn of profit within a group. Coupled with the introduction of this surcharge was an announcement of a gradual reduction in the bank levy over the next five years, which according to HM Treasury, is intended to outweigh the surcharge in the long term. However the measures will clearly lead to a redistribution of the tax burden. In particular, this will be an increased tax charge for banks which fell below the bank levy threshold but have taxable profits above the surcharge threshold.
For these purposes the definition of a banking company includes deposit takers and broker dealers, but does not include companies such as holding companies, SPVs, credit card companies and leasing companies, so a banking group may contain companies that are both in and out of the scope of the surcharge. For those companies that are in scope, it is important to note that the surcharge will be charged separately from corporation tax and the taxable profits for the purposes of the surcharge will not be capable of being reduced by pre-January 2016 losses or group relief from non-banking companies. Once the loss restrictions introduced for banks in Finance Act 2015 are taken into account, such that the amount of a bank’s annual taxable profits that can be offset by pre 2015 carriedforward losses is restricted to 50%, then from 2016, even if a bank has losses brought forward, it could still end up with a cash tax rate of around 18% on profits over the surcharge threshold.
Impact considerations
Possible responses could include reviewing:
Tax claims and elections, including those for periods prior to 2016, to consider the impact of making, amending or deferring particular claims, for example capital allowances, research and development reliefs, claims for foreign tax credits.
The transfer pricing policy across the group (in particular given that UK-UK transfer pricing will now be more critical).
The location of the business lines, booking and funding models in the group, along with consideration of the location of capital assets and the legal entity structure.
The impact of the surcharge on deferred tax assets and regulatory capital.
Expected or possible gains / losses for tax purposes including the timing of commercial transactions.
In response to this fundamental change to UK banking tax policy, it will be necessary for banks to undertake a detailed impact assessment. This will help in understanding the potential options which may be available as part of their wider group strategy, including any plans to restructure legal or booking models in the context of regulatory-driven structural reform. We recommend considering this as a matter of urgency in the coming weeks in advance of the introduction of the surcharge.
Bank corporation tax surcharge
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How EY can help We can provide more detailed guidance and support in understanding the new rules and their impact on your business. We can work with you to understand how action in some of the areas above may help to manage the impact of the surcharge.
Further information
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For further information, please contact one of the following or your usual EY contact: Anna Anthony
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020 7951 4165
Richard Clough
[email protected]
020 7951 7601
Dan Cooper
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020 7951 5381
Oliver Davidson
[email protected] 020 7951 1571
Andrew Eggleston
[email protected] 020 7951 0135
George Hardy
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020 7951 0124
Neil Harrison
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0113 298 2596
Stephanie Lamb
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020 7951 1700
Richard Milnes
[email protected]
020 7951 7750
Kevin Paterson
[email protected] 020 7951 1347
Mark Persoff
[email protected]
020 7951 9400
Julian Skingley
[email protected]
020 7951 7911
Sarah Bartram
[email protected]
020 7951 1058
Bank corporation tax surcharge
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