June 2010 Budget and Finance (No 2) Act 2010: implications for financial services firms

Initiative

June 2010 Budget reference and related documentation

New bank levy

The government announced that it will introduce a permanent bank levy based on banks' balance sheets from 1 January 2011. The levy is intended to encourage banks to adopt less risky funding profiles, and to rebalance the tax burden between banking and other sectors. The government believes that banks should make a fair contribution in respect of the potential risks they pose to the UK financial system and wider economy. The levy is therefore expressed as being reflective of economic risk rather than an insurance against failure or a fund for future resolution.

The levy will apply to the:

• Global consolidated balance sheet of UK banks, banking groups and building societies.

• Aggregated UK-group and UK subsidiary balance sheets, together with a proportion (determined in accordance with these provisions) of the balance sheets of foreign banks operating in the UK through permanent establishments (branches) which are members of foreign banking groups

• Aggregated UK-group and UK subsidiary balance sheets, together with a proportion (determined in accordance with these provisions) of the balance sheets of foreign banks operating in the UK through permanent establishments (branches) which are members of foreign banking groups.

• Balance sheets of UK banks and banking sub-groups in non-banking groups.

• Balance sheets of UK banks that are not members of groups.

The levy will only apply where the aggregate long- and short-term liabilities of the institution or group are at least £20 billion, subject to certain exclusions which include, among other things, Tier 1 capital, insured retail deposits, repos secured on sovereign debt, and policyholder liabilities of retail insurance businesses within banking groups.

The levy will not be deductible for Corporation Tax and there will be anti-avoidance provisions to prevent avoidance of the levy.

The rate of the levy will be charged at a rate of 0.07%, although there will be a lower rate of 0.04% in 2011. There will also be a reduced rate for wholesale funding with more than one year remaining to maturity of half the main rate (0.02% then 0.035%). [Note: the final legislation implementing bank levy changes the rate of the levy. For 2011 it will be 0.05% and will rise to 0.075% from 2012.]

The government published final legislation to implement the bank levy on 9 December 2010 in an impact note. Legislation in Finance Bill 2011 will introduce the Bank Levy

For more information on the bank levy, see Practice note, Bank levy (www.practicallaw.com/7-503-7740).

Chapter 1, page 26, paragraph 1.63

Chapter 2, page 50, paragraph 2.78

HM Treasury statement: Government introduces banking levy

Joint statement on bank levies from the UK, French and German Governments

HMT: Bank Levy impact note

Promoting lending to SMEs

The government wants to promote lending to small and medium-sized enterprises (SMEs). In response to this, on 22 June 2010, the British Bankers' Association (BBA) published a set of new principles that must be followed by high street banks when lending to SMEs.

In summary, the six commitments will require banks to:

• Use in-house guides or industry-standard literature to provide guidance on the factors that determine pricing.

• Always inform customers of the time it will take for a lending decision to be taken.

• Ensure they have fair and effective processes in place to review decisions to decline a lending request.

• Provide proactive and clear feedback to SMEs when a borrowing request is declined.

• Work with SME representatives and with the Lending Standards Board (LSB) to promote the commitments and the Lending Code.

• Allow SMEs to bring their professional advisers with them to support them in their discussions with their business manager.

For more information, see Legal update, BBA announces binding commitments to support SMEs (www.practicallaw.com/2-502-5853)

Chapter 1, page 27-28, paragraphs 1.70-1.71

BBA press release: Banks are open for business and will play their full part in financing the recovery

Green paper on business finance

The government announced that it will publish a green paper on business finance before the summer recess. The paper will consider the range of finance options for businesses of different sizes including bank lending, equity and corporate debt. It will also invite views from business, investors and lenders on priorities and approaches to enhancing the access of businesses to appropriate sources of finance. It was not clear to what extent this might result in regulatory changes for lenders.

For details of the green paper subsequently published by the government, see Legal update, Government green paper on business finance (www.practicallaw.com/8-502-8943).

Chapter 1, page 28, paragraph 1.74

Initiative

June 2010 Budget reference and related documentation

Bank bonuses

The government has announced the following measures to address "unacceptable bank bonuses":

• It will work with international partners to explore the costs and benefits of a financial activities tax (FAT) on profits and remuneration. The International Monetary Fund (IMF) has subsequently presented a report on financial services taxation to the G20 at its June 2010 summit in Toronto in which it proposes two forms of financial sector contribution (a financial stability contribution and a FAT) (see IMF report on financial services taxation (www.practicallaw.com/0-502-6518)).

• It will consult on a remuneration disclosure scheme. Although not made clear in the June 2010 Budget, it would appear that this is the consultation promised by the previous government on executives' remuneration disclosure in March 2010 (see Legal update, HM Treasury publishes draft regulations on executives' remuneration disclosure).

• It has requested the FSA, as part of its forthcoming review of its Remuneration Code, to:

  • consider whether to impose more stringent requirements on the deferral and award of variable pay;

  • examine mechanisms for strengthening the link between performance and remuneration to ensure that incentives are aligned with the long-term performance of the firm; and

  • consider how to vary capital requirements to offset risk in remuneration practices.

As part of the government's proposals relating to remuneration, HM Treasury published the terms of reference for the Independent Commission on Banking on 16 June 2010 (see Legal update, Treasury launches independent commission on banking).

In the 2009 Pre-Budget Report, the Chancellor announced the introduction of a temporary bank payroll tax (BPT) payable by banks and other financial services firms. For more information on this and other ongoing initiatives relating to remuneration policies and arrangements in the UK financial services sector, see Remuneration: key developments tracker.

Chapter 1, pages 32-33, paragraph 1.99

Chapter 2, page 50, paragraph 2.79

Initiative

June 2010 Budget reference and related documentation

Insurance premium tax

The government announced that it will introduce legislation in the Finance Bill to be introduced after the June 2010 Budget to increase the standard and higher rate of insurance premium tax (IPT) to 6% and 20% respectively. The increases will apply to premiums received, or in relation to which the written premium date falls, on or after 4 January 2011.

HMRC has published draft legislation effecting the increases. The draft legislation modifies existing anti-avoidance provisions (sections 67A and 67C, Finance Act 1994) with the effect that insurers cannot avoid the increase by adding additional or new risks to, accepting payment for, or extending contracts between the date on which the increases were announced (22 June 2010) and the date when they have effect (4 January 2011).

The Finance (No 2) Bill 2010 included legislation to increase the rates of insurance premium tax to 6% (standard rate) and 20% (higher rate). The increases apply to premiums received, or in relation to which the written premium date falls, on or after 4 January 2011. This measure was implemented by section 4 of the Finance (No 2) Act 2010.

Chapter 2, page 51, paragraph 2.83

HMRC BN 19: Insurance premium tax: increase in the standard rate and higher rate

HMRC draft legislation and explanatory note

Finance (No.2) Bill 2010: insurance premium tax (www.practicallaw.com/6-502-6884), Part 1

Finance (No.2) Act 2010, section 4 (www.practicallaw.com/1-502-9173)

Life insurance: transfer of business to a non-EEA overseas company

The government announced that it will informally consult with industry, over summer 2010, on draft legislation to modify the rules governing transfers of life insurance business to ensure that an unintended tax charge does not arise when a UK life insurance company transfers long-term insurance business to a non-EEA overseas company. The Finance (No 2) Bill 2010 which is due to receive Royal Assent on 16 December 2010 introduces legislation to implement this measure.

Chapter 2, page 54, paragraph 2.113

HMRC BN15: Life insurance companies: changes to tax rules

Life insurance: transfer of business involving excess assets: anti-avoidance

The government announced that it would introduce legislation in the Finance Bill following the June 2010 Budget for a new anti-avoidance rule to apply when a transfer of business avoids the rules for non-profit funds with unrecognised profits. The new rule will be effective in cases where life insurance business is transferred to another company to prevent manipulation to avoid tax on previously unrecognised profit.

HMRC published a technical note on the form of the anti-avoidance rule was published alongside the March 2010 Budget (see HMRC BN19: Life insurance companies: apportionment of income and gains). HMRC intends to consult further with the industry to ensure that the final legislation is effective and targeted.

Section 9 of the Finance (No 2) Act 2010.

Chapter 2, page 54, paragraph 2.113

HMRC BN15: Life insurance companies: changes to tax rules

Finance (No.2) Act 2010, section 9 (www.practicallaw.com/1-502-9173)

Life insurance: deficiency relief

The government has announced that it will not extend life insurance deficiency relief to the additional rates of tax. Instead, the deficiency relief rules will continue as at present and will reduce tax due on income subject to the higher rate and dividend upper rate of tax only.

This revokes the commitment made by the previous government in the March 2010 Budget.

Chapter 2, page 51, paragraph 2.84

Initiative

June 2010 Budget reference and related documentation

UCITS IV implementation

The government announced that it will hold discussions with industry, including formal consultations, on the implementation of the new UCITS Directive (2009/65/EC) (UCITS IV) (for more information on developments relating to UCITS IV, see Practice note, Hot topics: The UCITS IV Directive.

Chapter 2, page 50, paragraph 2.81

Asset management: taxation

In addition to its plans regarding UCITs IV implementation (see item above), the government announced that it will also hold discussions with industry, including formal consultations, on other issues concerning the asset management industry which include:

• The possibility of introducing a tax-transparent contractual fund vehicle (for the current position, see Practice note, Investment trusts: tax).

• Reviewing the taxation of investment trust companies and funds investing in non-reporting funds (for the current position, see Legal update, Authorised investment funds investing in offshore funds: regulations made).

• Reviewing the stamp duty reserve tax rules relating to investment funds in Schedule 19 to the Finance Act 1999 (for the current position, see Practice note, Unit trusts and open-ended investment companies: tax: Stamp duty surrenders and transfers of units in a unit trust or shares in an open-ended investment company) in the context of investments in underlying funds. Legislation will be introduced in the Finance Bill 2011 to extend the situations in which fund managers can treat an interest in an underlying scheme as an exempt investment. It will also make a minor consequential change to when an interest in a collective investment scheme is classed as a chargeable security for the principal stamp duty reserve tax (SDRT) charge.

These issues were suggested as consultation topics as part of the March 2010 Budget.

Chapter 2, page 50, paragraph 2.81

HMT impact note: Reform of Stamp Duty Reserve Tax on Collective Investment Schemes

UK Real estate investment funds (UK REITs)

The government announced that it will introduce legislation in the Finance Bill to be introduced in autumn 2010 to allow UK REITs to issue stock dividends as an alternative to cash dividends in meeting the requirement to distribute 90% of the profits from the property rental business of the REIT.

The changes will apply to property income distributions made on or after the date that the legislation receives Royal Assent.

This measure was announced in the March 2010 Budget and is identical except that the current version makes it clear that income tax will have to be accounted for when a property income distribution is made by way of stock dividend.

The Finance (No 2) Bill 2010, which is due to receive Royal Assent on 16 December 2010, introduces legislation to implement this measure.

For more information on UK REITs see, Practice note, UK REITs: questions and answers.

Chapter 2, page, paragraph 2.156

HMRC BN18: UK Real estate investment trusts and stock dividends

Authorised investment funds: tax avoidance

The government has enacted legislation alongside the June 2010 Budget aimed at preventing corporate investors from using authorised investment funds (AIFs) to create UK tax credits without any corresponding UK tax charge.

For a more detailed explanation of the legislation, which came into effect on 22 June 2010, see PLC Tax, Practice note, June 2010 Budget: key business tax announcements: Authorised investment funds and artificial tax credits (www.practicallaw.com/5-502-5267).

For more information on the taxation of AIFs and their investors generally, see Practice note, Unit trusts and open-ended investment companies: tax.

Chapter 2, page 53, paragraph 2.111

HMRC BN 16: Corporation tax avoidance: authorised investment funds

The Authorised Investment Funds (Tax) (Amendment No. 2) Regulations 2010 (2010 No. 1642)