By Daniel Hunter
There has been a "dramatic" fall in corporation tax paid by UK banks, despite growing profits, according to research by Cambridge Judge Business School.
Total UK corporation tax receipts from the banking sector declined from £7 billion in 2005/06 to £1.3bn in 2011/12 and £2.3bn in 2012/13 — or a fall from about 20% of total UKCT receipts in 2005/06 to just 4% by 2011/12.
Using a sample of the six largest UK banks (HSBC, Barclays, Royal Bank of Scotland, Lloyds, Standard Chartered and Nationwide), the study found that operating profit of those banks actually increased slightly between 2005-07 and 2010-12, from £139bn to £143bn.
The banks have been subject to a bank levy in recent years, based not on profits but on the balance sheet of equity and borrowing. The study found that so far, the levy has generated less revenue than forecast and has filled only a modest part of the gap in UK corporation tax receipts.
While profitability of major UK banks recovered to levels seen before the financial crisis, there has been a sharp fall in banking corporation tax receipts by the UK Treasury,” said Geoff Meeks, Professor of Financial Accounting at Cambridge Judge.
“The exact reasons are difficult to pinpoint due to incomplete and patchy disclosure requirements on banks, which we believe obstruct analysis. In particular, there’s a paucity of required disclosure on the distribution of large banks’ profits and tax between national jurisdictions.”
So what has caused this disconnect between UKCT generated from British banks and those banks’ global profitability?
The study found that a rise in tax-deductible impairments due largely to bad loans contributed to the fall in UKCT receipts for banks, while a decline in the statutory UK corporate tax rate from 30% in 2005/06 to 26% in 2011/12 caused only a “relatively small” reduction of £200m in corporation tax banking receipts.
The study examines closely the reduction, from 30% to 11%, in the corporation tax proportion of global taxation reported in the income statements of four of the big banks (Barclays and RBS are excluded from this sample because they had “in the most recent years, not been clearly disclosing the UK component of their taxation total.”). While global tax for those four banks increased slightly between 2005/07 and 2010/12, from £12.69bn to £12.85bn, the amount paid to the UK Exchequer declined from £3.8bn to £1.4bn, or from 30% of global tax to just 11%.
The study looked at whether or not this sharp decline reflects larger profits originating outside the UK, more generous UK tax exemptions, or a reclassification of some UK-originating profits to other jurisdictions — and concludes that “incomplete disclosures” resulting from current reporting requirements for banks results in “mystery” that severely hampers the forecasting ability of both the UK’s Office of Budget Responsibility and the banks’ shareholders. In particular, there is “often patchy or opaque” disclosure on the allocation of taxation between jurisdictions in banks’ annual reports.
These incomplete disclosures “must constrain the OBR’s ability to forecast the tax revenues which are needed to repay the extraordinary government borrowing used to bail out the banking system,” the study concludes. “Similarly, they must hinder the shareholders of the banks in forming their expectations of future earnings — to the detriment of capital market efficiency.”