Banks’ profits recover, but they are paying less in corporation tax

Research shows corporation tax receipts from banks are lower than before crisis despite global tax payments staying constant

Britain’s banks are paying far less in corporation tax to the Exchequer than before the crisis, despite their profits improving and global tax payments staying constant.

Research from Cambridge Judge Business School has shown that for every £10 in taxes paid by the biggest banks, just £1 is paid in the UK, compared to £3 between 2005 and 2007.

Corporation tax receipts from the banking sector fell from £7bn in 2005-06 to £1.3bn in 2011-12 and £2.3bn the year after, despite profits being similar.

The academics, which studied the accounts of Royal Bank of Scotland, Lloyds, HSBC, Barclays, Standard Chartered and Nationwide, said banks’ opaque accounting practices made it difficult to assess why corporation tax receipts in the UK were so low.

However, it suggested that tax exemptions from HMRC, and shifting UK profits offshore, may explain some of the difference.

Analysis of the banks’ financials – minus RBS and Barclays, which the researchers said had not disclosed UK tax payments – showed that of £12.9bn in global tax payments, £1.4bn was paid in the UK between 2010 and 2012.

Between 2005 and 2007, the four banks paid £12.7bn in global corporation tax and £3.8bn in the UK.

The research, published in the journal Fiscal Studies, said tax avoidance measures may be behind some of the shortfall.

Policies designed to prevent “double-taxation” of overseas income introduced in recent years may have meant overseas profits being paid to the UK holding company as dividends, and may also have meant some UK profits being diverted overseas, the research said.

However, it said a “paucity of required disclosure” from the banks made it impossible to tell. It said this would make it difficult for the UK’s fiscal watchdog, the Office for Budget Responsibility, to predict tax receipts from banks.

“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.”

Corporation tax rates fell substantially under the last government, although this accounts for only a small proportion of the decline, the research said, adding that the banks’ finances did not suggest they were now making a greater share of profits abroad than they were before the crisis.

Banks, like other companies, are able to offset historic losses against corporation tax receipts, which may explain some of the shortfall.

George Osborne took action on banks’ use of these deferred tax assets in last year’s Autumn Statement, saying that they could only offset half of their profits against historical losses.