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UK banks biggest budget losers as US$7.8b tax rise looms

[LONDON] British banks were the biggest losers in George Osborne's last budget before May's election after being hit with tax increases that will cost the industry 5.3 billion pounds (US$7.8 billion) over the next five years.

The government will increase a levy on lenders' balance sheets to raise 900 million pounds more a year, Mr Osborne told lawmakers on Wednesday. Banks will also be barred from deducting the costs of compensating clients from taxable profit at a cost of almost 1 billion pounds over the next five years.

HSBC, Europe's largest bank with US$2.6 trillion of assets, will be most hit by the balance sheet levy. Lobby groups criticized the move saying it will force firms to move jobs out of the UK and make London less attractive a place for overseas banks to invest.

"The banks have really been clobbered," Andrew Hubbard, a tax partner at Baker Tilly, said by e-mail.

With the Conservative party running neck-and-neck with the opposition Labour party 50 days before an election, Mr Osborne is distancing himself from an industry that's been tarnished by scandals from market-rigging to insurance products. He told lawmakers on Wednesday that banks must make a "bigger contribution" to reduce the deficit as he cut duty on beer and offered tax incentives to savers and first-time homebuyers.

From April, the government will increase the levy to 0.21 per cent from 0.16 per cent. The tax, first announced in June 2010, has been increased eight times and was designed to raise at least 2.7 billion pounds in 2014 to 2015 and 2.9 billion pounds each year thereafter. It will raise an additional 4.4 billion pounds over the next five years, the Treasury estimates.

"This will hit the banks with the largest balance sheets hardest," said Anna Anthony, head of Europe, Middle East, India and Africa Tax for Financial Services at EY, an audit firm. The levy "makes London a less attractive place to be headquartered for those banks with most of their assets outside the UK." The levy has yet to raise the money targeted by the government as firms shrink their assets following the financial crisis of 2008. Last year, it generated 1.9 billion pounds: HSBC paid 750 million pounds, followed by Barclays Plc with 462 million pounds. Royal Bank of Scotland Group Plc and Standard Chartered Plc paid 250 million pounds and 249 million pounds, respectively, and Lloyds Banking Group 238 million pounds.

"If you were the new helmsman of Standard Chartered, or beleaguered HSBC management, re-domiciling must be an increasingly tempting option," said Jonathan Tyce, senior banks analyst at Bloomberg Intelligence in London.

Like HSBC, Standard Chartered has most of its assets in Asia, where it generates the largest share of revenue. Executives at both banks have indicated in the past that they plan to keep headquarters in London. Officials at the banks declined to comment on their plans.

HSBC advanced 1.6 per cent in London on Wednesday, Barclays 0.9 per cent and RBS 0.3 per cent. Lloyds was little-changed.

"The bank levy increase will be painful," said Tom Aston, financial services tax partner at KPMG LLP. "It will be a case of one step forward two steps back for banks who are trying to deliver cost cutting commitments." Lloyds and Barclays will be the most affected by the rule stopping banks from deducting the cost of customer redress from taxable profit because they have the biggest unused provisions for payment-protection insurance, Bloomberg Intelligence's Tyce wrote on Wednesday.

Lloyds had 2.5 billion pounds of unused PPI provisions at the end of 2014, followed by Barclays with about 1 billion pounds, according to Tyce.

To help return to a budget surplus by 2018, the government said it will sell a further 9 billion pounds of shares in Lloyds. The government owns 23 percent of the lender after providing a 20 billion-pound bailout during the financial crisis. It will also sell 13 billion pounds of mortgages it took over during the bailouts of Northern Rock and Bradford & Bingley.