Banks and financial institutions operating in the UK that hold £20bn or more in assets will need to pay a levy from the beginning of 2011.
The government believes that as the banks pose potential risks to our financial system they should make a fair contribution and move to less risky funding profiles.
This tax levy will be applied to the consolidated balance sheets of banking groups in the UK regardless of whether they are UK or foreign owned.
The business bank account levy will be based on both short term and long term liabilities but will exclude Tier 1 capital, repos secured on sovereign debt, insured retail deposits and liabilities of policyholders in the retail insurance business.
The starting rate will be 0.04% in 2011 but this will rise to 0.07% thereafter. The levy will be administered by HMRC and anti-avoidance provisions will be put in place to prevent evasion.
The UK is not the only country to feel that banks should pay a price. France and Germany joined with the UK in issuing a joint statement yesterday on banking levies. The other 2 European countries plan to impose a similar tax shortly.
However, not everybody is happy about this new levy. Some people believe that it will reduce the capacity of the banks to lend money, just at a time when we most need them to. The objectors would have preferred to see the Chancellor introduce a tax on the kind of high-risk transactions that lead to big bonuses.
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