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Clause 1 — Main rate of corporation tax for financial year 2011

Part of Finance Bill – in the House of Commons at 7:00 pm on 12th July 2010.

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Photo of Andrew George Andrew George Liberal Democrat, St Ives 7:00 pm, 12th July 2010

The hon. Gentleman's point is, in a way, a development of an argument that was made earlier, when he was not here, regarding the contrast between the proposed level of the banking levy in the UK and that in the US. That potential osmosis of banking activity and investment may or may not happen. Andrea Leadsom argued that having differential rates of corporation tax would be anti-competitive, but, at the same time, Members on the Government Benches are arguing for differential rates in the sense that the banking levy differentiates between the banking sector and all other sectors. One of the purposes of my amendment is to probe the issue further.

It is often only one, two or three days, or possibly even a week, after the Budget announcement that people finally get the opportunity to scrutinise the Red Book and consider the issues and what the financial press have been saying. I have to say that after the Budget, my initial euphoria at the announcement of the banking levy was somewhat dampened when I looked into matters further. On 8 July I received an answer from the Financial Secretary to the Treasury to six questions that I had asked. Among other things, I asked about the discussions that the Treasury had had on this issue; the research that it had commissioned on the impact; the modelling it had done; the criteria that were used to determine the proposed rate of the banking levy; and the estimates that the Department had made of the revenue that would accrue to the Exchequer if the bank levy were set at various incremental rates from 0.05% to 0.15% over the forthcoming period. However, not much information is available in that regard. The Financial Secretary's reply states:

"No external research was commissioned in respect of the bank levy prior to the financial statement. The proposed rate reflects the risks posed by the banking sector to the financial system and wider economy, whilst taking account of current economic circumstances and the UK's competitive position."

His answer also cites the Treasury's costings that were published alongside the Budget and adds:

"No quantitative estimates have been made of the differential behavioural effects of setting the levy at these other rates. An impact assessment will be published alongside the forthcoming consultation document." -[ Hansard, 8 July 2010; Vol. 513, c. 412-13W.]

Page 19 of the costings document addresses the post-behavioural yield of the banking levy. It states:

"The key behavioural changes that we have assumed will impact on the yield forecasts beyond the pre-behavioural effects are: a reduction in the tax base as a result of the potential incentive for banks to remove liabilities from the levy base; a further switch towards longer-term funding at a similar magnitude to pre-behavioural estimates; the levy will further reinforce existing incentives for banks to increase their capital positions in anticipation of expected regulatory reforms...in terms of avoidance behaviour we have assumed avoidance activity will decrease the yield by 5 per cent in each year of operation. This assumption is made to allow for appropriate margin in the public finances and does not represent an official estimate of avoidance."

That goes back to an earlier debate. So, despite my having probed this matter by asking a number of questions, we do not have any clear answers on the balancing effects of the reduction in corporation tax against the banking levy.

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