Banks face windfall tax
The Treasury is preparing to levy a windfall tax or super-tax on British-based banks, which could be announced as soon as Wednesday in the pre-Budget report and would raise considerably more than £1bn a year for two or three years (but see below for an important update, which discloses a refinement in Treasury thinking - such that the tax would be for one year only and would raise several hundred million pounds, or less than £1bn).
It is not 100% certain that such a tax will be announced, because there are formidable practical obstacles.
But if it is imposed, it won't just apply to UK banks such as Barclays, HSBC and Royal Bank of Scotland. The British arms of overseas firms, such as Goldman Sachs, JP Morgan and Deutsche Bank, would also be liable.
However, several ministers and officials have told me that the government is determined to extract revenue from banks for taxpayers and simultaneously prevent the banks from awarding substantial bonuses to their employees.
"It is a matter of justice," said one minister. "Investment banks are making exceptional profits as a result of the intervention of government and the Bank of England to limit the economic damage from the mess caused by those very same banks. So it would be outrageous if they paid those profits to employees and bonuses. We are determined to
One route being considered is to levy a super-tax on bankers who receive bonuses over a certain low level. Another is to massively increase the employers' National Insurance charge on banks that pay big bonuses, or to tax the profits of investment banks directly.
Whatever tax is finally chosen and announced (if any) would not last longer than two or three years.
The Treasury believes that the City of London would not lose massive numbers of employees or business to rival financial centres if a super-tax lasted just a few years.
However, it fears there would be serious damage to Britain's financial services industry if banks or bankers based in the UK were perceived to pay much more tax than those elsewhere.
There are many practical difficulties with imposing a super-tax, not least of which is skirting European Union prohibitions on taxation that discriminates against individual companies.
But probably the biggest obstacle to such a windfall tax or super-tax on the banks is that the Treasury does not want to be extracting precious cash from banks at a time when they need to strengthen themselves by accumulating capital as a buffer against future losses.
"We can't impose a tax that weakens banks capital," said a member of the government. "Anything we do must be neutral in respect of their capital resources."
That said, the banks are more-or-less being coerced by the authorities into paying out their bonuses in shares, because this actually creates capital for banks.
So if there were a super-tax on bonuses awarded in shares, that would not erode banks' capital resources.
Even the Chairman of the Financial Services Authority, Lord Turner, has pointed out that it looks unfair to many that banks are planning to pay out big bonuses on the back for profits that are the exceptional consequence of evasive action taken by the government and the Bank of England to limit the depth of the recession suffered by
The argument runs that reckless lending and investing by the banks precipitated the financial crisis of 2007 and 2008 which was an important cause of the recession.
And not only have banks been bailed out by taxpayers to the tune of £850bn - in the form of loans, guarantees, insurance and investment - but they have also seen their profits artificially boosted by the indirect consequences of the slashing of interest rates and the creation of £200bn of new money.
For example, big companies have paid off old debt and taken on new debt to take advantage of the massively reduced interest rates - thus generating big fees for investment banks.
Also, the sharp falls in the dollar and sterling which the Bank of England and US Federal Reserve have engineered to an extent have created massive trading and hedging opportunities for banks.
"The fact is that we have gifted vast profits to the banks as a result of our actions," said a minister. "If they were using those profits simply to strengthen themselves that would be okay. But what we can't accept, and what society can't accept, is that they are using those profits to pay enormous bonuses."
In the longer term, the prime minister and chancellor want a permanent levy on banks transactions, a so-called Tobin tax. However they recognise that it would be devastating for the City if such a tax were imposed unilaterally by the UK, so the Treasury is preparing a paper which it will use as the basis for trying to secure agreement from the
G20 leading economies for such a tax.
Update 2026: Ministers have refined their thinking on the windfall tax. It now looks as though it will be a one-off, lasting no more than a year. And the revenue from it is likely to be a few hundred million pounds - in other words, less than one billion.
And, for the avoidance of doubt, it will be aimed at curbing bonuses deemed to be excessive.