Project Merlin claims the banks will be making a tax contribution of at least £8 billion to the UK Exchequer this year. It was a number that anyone with an ounce of knowledge of recent banking tax history could see was artificial. This just doesn't even vaguely relate to the tax that banks pay if you bother to actually ask people what tax banks really suffer.
Of course, in popular perception the tax that banks pay is corporation tax - and rightly so. Most of the other taxes that will very obviously go to make up this tax are other costs of sale on which they get tax relief - like VAT included in their purchases, or taxes actually really suffered by other people. Employer's national insurance is an example of the latter - it's a tax that all economists agree is really paid by employees who simply see their gross wages reduced to reflect that part notionally paid by their employer. In other words, this is not a real cost to banks at all.
And if in doubt that VAT is not a real cost consider the simple fact that banks only pay VAT themselves becasue they do not charge VAT on their services to their customers - which means that their products are relatively underpiced compared to almost all other services a consumer can buy, most of which will have VAT included in them. In this case the VAT paid by banks is not a measure of what they're paying, it is a measure (yet again) of the way the tax system is used to provide them with a hidden subsidy.
So let's get back to the one tax the banks do pay as a charge on the income they make - which is corporation tax. As the Mail on Sunday notes today, based on research I did for them, the likelihood that any of our big banks will be paying any serious sums in corporation tax for a while to come is remote in the extreme. That's because the 2009 accounts of each of the major banks shows just how much deferred tax asset they're sitting on relating to tax losses that they can offset against their future profits - including those subject to Project Merlin. The figures are:
HSBC _ £4.2 billion
Barclays - £1 billion
Lloyds - £4 billion
RBS - £5.1 billion
Add them together and that's more than £14.3 billion of tax that's not going to be paid any time soon. Or at UK current corporate tax rates some £51 bn of profit that needs to be earned before tax is paid.
Now of course not all that tax will not be paid in the UK, I admit.
But let's also be candid - these are UK banks and so some of it definitely will not be paid here. Which makes Project Merlin look even more like a sham.
And whose accounting logic is behind it? Why, PricewaterhouseCoopers and its Total Tax Contribution of course - their purely political form of accounting designed to add up every penny a company pays to government for the sole purpose of seeking reduction in the one rate that really maters - which is corproation tax.
The Total Tax Contribution was the invention of John Whiting when he was at PWC. Of course he's now director of the Office of Tax Simplification. No coincidence there then, eh?
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@Richard
‘The Total Tax Contribution was the invention of John Whiting when he was at PWC. Of course he’s now director of the Office of Tax Simplification. No coincidence there then, eh?’
No, just another example, from many, many, many, of regulatory capture. Or, lets call it what it really is – cronyism in the extreme.
On a related point, I think if we take the recent announcements on taxation, the (pretty obvious) outcomes of bodies such as the OTS, and actions such as the handling of the Vodaphone case (i.e. an implicit change in policy) together we can now see why the government can continue downsizing HMRC: in two or three years it will be a very nuetered version of what it traditionally was as the scale and scope of its remit is significantly reduced.
It is extraordinary what PWC have got away with in recent years – some of their audits, not to mention their work as administrators and liquidators, beggars belief. However, I am hopeful their own arrogance and contempt for the ordinary British tax payer will be their undoing in the near future – or at least it will be for certain people in their organisation. Not that HMRC are on the case at the moment. Still, plenty of time. Rats, sinking ships and all that.
i am a football fan – But can you please tell me if the clubs pay VAT on the sale of players – & if not why not? They call it a transfer market which is really a misnamed term – because they are really selling a comodity – I have asked my MP to look into this – but he didnt seem that concerned. I look forward to your reply
To be honest the paragraph about VAT being a hidden subsidy to the bank shows absolutely shocking ignorance of the way VAT actually works. I find it difficult to believe a Chartered Accountant could write that. Words fail me. Pure rubbish.
@Derick Woodland
Well, I’ve never considered it but my instinct is they are subject to VAT – but that’s irrelevant as it’s a business to business transaction and so reclaimed by the purchaser
@Neil McKie
Shocking isn’t it that the Institute for Fiscal Studies agree on this one – and made it a big issue in their Mirrlees report
Terrible that I’m in their company, I agree
But also likely to suggest you’re the one in the wrong
This idea that there’s some sort of untapped golden pot of taxation that can allow us to painlessly avoid cuts and increases in personal taxation is a constant myth. I also note that many commentators equate the interests of overpaid bankers as synonymous with shareholders. In fact the former (at least in investment arms) are a cabal of privileged employees who have essentially hijacked the company’s resources in order to enrich themselves through risky behaviour, the consequences of which are picked up by the state and shareholders. Most shareholders don’t have much say in this – they generally indirectly invest through the medium of their pension schemes and other investments. An attack on bank profits is primarily an attack on shareholders, not bankers, and that is the interests of vast numbers of ordinary people who are vulnerable to reduced returns (which have been hugely reduced anyway).
The corporation tax take in the UK, as measured by proportion of GDP has, I believe, been fairly steady over the years (about 3.5-4% I believe). From what I can find that is relatively high by the standards of most comparable countries. I suspect it will be difficult to try and increase that without creating some perverse incentives which could actually reduce the amount received and also reduce UK activity. It could, of course, be possible to stop, or limit the ability of companies to carry forward losses to subsequent years, but those rules were produced for a reason to encourage longer term investment and business enterprise.
If more corporation tax is taken then there will be less for distribution as dividends, it will reduce both the return and capital value to pension and other investment funds.
Of course I would welcome more transparency, but as the current nonsense figures that the press have latched onto show, it’s very easy to create misleading comparisons, and the whole area of international corporate taxation is fiendishly complex.
It is no wonder that States have to overwhelmingly depend on taxes on economic activity as they are much easier to define and apply locally. Personally I would wish the debate was much more about the optimisation of economic effects than the morality play that many commentators would make it. All tax policies have social and economic consequences, and too often the debate is about just one side.