15 January 2008

Tax tensions threaten to drive banks away

London’s pre-eminence as an international financial centre could be damaged by friction over tax issues, foreign banks have warned. The Association of Foreign Banks says that several new tax initiatives ran the risk of making the UK a less business-friendly location for banks. John Treadwell, managing director, said: “The foreign banks contribute greatly towards the success of London ... and the government should not forget that these banks always have a choice of location.”

Tensions between foreign banks and the government have increased as a result of a Revenue & Customs crackdown on offshore accounts, planned tax increases for foreigners in living the UK and more stringent rules on the number of visits that can be made to the UK before being deemed resident for tax purposes.

Mr Treadwell said: “The government must ensure that it continues to provide a supportive environment in the UK for foreign banks to grow their business, and not introduce measures which could threaten London’s position as the major international financial centre or send out messages which [imply] London is not a friendly place for foreign banks.”

“The government is in danger of going down this route with its recent announcements on, for example, offshore accounts, proposed taxation changes for non-domiciled residents, changes to residency rules and the new work permit system. They must enter into regular dialogue with the foreign banking community and take notice of their concerns.”

The dominance of London as a financial centre has increased in recent years, with last year’s City of London Corporation Global Financial Centres Index putting London’s competitiveness ahead of New York, Hong Kong, Singapore and Zurich. But concerns about transport and its tax and regulatory regime led Gordon Brown in 2006 to set up a high-level group on City competitiveness with representatives of the financial sector, which has continued under Alistair Darling’s chancellorship.

The AFB, together with the British Banking Association and the Building Societies Association, were dismayed by an approach last year to some 150 banks and licensed deposit takers, urging them to co-operate with a crackdown on offshore tax evasion by filling in questionnaires concerning record keeping and information technology systems. The Revenue said this would simplify and streamline its efforts to obtain legal notices requiring institutions to hand over account information for British residents with offshore accounts.

The banking associations told the Revenue that its questionnaire raised “considerable concerns” for their members, stressing that they could not compromise their obligation of customer confidentiality without the compulsion of law. “If this principle [confidentiality] were to be publicly challenged the shock ... could be fundamental and destabilising,” the associations said in a letter.

The BBA said that after the Revenue’s loss of personal data for child benefit recipients, it would be premature to provide more information on offshore account holders to Revenue & Customs. The AFB also voiced particular concerns about possible conflicts with the banking secrecy laws in other jurisdictions.

Dave Hartnett, the acting chairman of Revenue & Customs, said some banks had filled in the questionnaires, while those that had not would be the subject of more searching inquiries by the Revenue, prior to its application for an information notice from the Special Commissioners.

Many foreign bankers based in London are also personally affected by changes in the tax rules for non-domiciled residents being introduced in April, which will require them to pay a £30,000 ($59,000, €40,000) fee to keep their offshore income out of the British tax net. The government’s policy on work permits is also a concern to some foreign bankers moving to the UK, particularly if they want to continue to employ nannies who are not European citizens.

© Graham Bishop