Challenger banks lose bid to avoid new tax on profits

But Treasury officials did agree to consider charging smaller banks a lower rate of tax or increasing the threshold for the tax at some point in the future

George Osborne's tax changes have provoked anger and dismay from challenger banks, which found themselves with an unexpectedly large tax bill

Britain’s upstart challenger banks won't be exempt from a new bank tax being introduced by the Chancellor George Osborne - but the Treasury may offer some tweaks to soften the blow for smaller lenders.

A delegation of leaders from some of the UK's newer players met with officials on Friday to make their case that they shouldn't have to pay the tax, which imposes an additional 8pc levy on banks with profits above £25m.

The Treasury will consider the idea of charging the tax at a lower rate for smaller banks or raising the threshold at which banks start paying the tax, in a compromise for challenger sector, which was shocked by the Chancellor's decision to introduce the tax in this year's summer Budget.

"The minute Labour got involved, it became too political"

However, such changes, if they do come, are not imminent.

The delegation, including representatives from Aldermore, Secure Trust Bank, Metro Bank and OneSavings Bank, had hoped to persuade officials that the tax would harm their ability to lend and grow, reducing their potential to provide real competition to the giant banks.

"The outcome is frustrating," said Paul Lynam of Secure Trust Bank. "We have made it clear we are looking for deeds to match the words on fostering competition and creating a level playing field.

"There was no commitment [from the Treasury], but they agreed to consider it."

The challengers will meet among themselves next week to plan the next step in their campaign. They will consider data from the British Bankers' Association on the impact of the tax, which they say will show it can raise enough money from the big banks to preclude the need for extending it to smaller players.

No change of tack

Until the Budget, Mr Osborne had won praise from the challengers for encouraging competition in the sector.

Challenger banks had hoped that their inclusion in the tax was merely an unintended consequence of a policy designed to apply to the bigger players. But after a Labour motion to tweak the Finance Bill to take account of their concerns was defeated in Parliament this week, the banks now fear it will be difficult for the government to change tack without losing face.

Secure Trust Bank's boss Paul Lynam is a particularly fierce critic of the tax, arguing that it adds to the burden of regulation holding challengers back

A source at one bank said that Labour’s support for changing the tax had been the nail in the campaign’s coffin.

“The minute Labour got involved, it became too political. It would have been better if it had been handled more quietly,” the insider said.

Paul Pester, chief executive of TSB, had hoped that the threshold at which banks start paying the extra tax could be hiked from £25m to £250m.

Meanwhile building societies including Nationwide have called for the tax to be applied only to banks and not to mutually owned lenders.

The new tax was announced in the summer Budget alongside changes to the bank levy. The levy is a charge on the biggest banks’ global balance sheets, and was introduced in the wake of the financial crisis as a means of raising funds for the Government and encouraging banking giants to slim down their operations.

The bank levy has since been hiked further, resulting in HSBC’s threat to move its headquarters out of the UK.

The Chancellor has since agreed to cut back the bank levy over the coming years, and impose the 8pc tax instead - a plan that will raise £1.6bn over five years for the Treasury, but also relieve some of the pressure on the big banks with major international arms.

However, this has opened Mr Osborne up to claims that he is easing off on the big banks and hitting the smaller lenders instead.

“While Britain is host to some of the largest and most successful banks on the planet, the government has been consistently clear it wants to see a more vibrant and competitive banking sector with new banks and more innovation, benefiting working people and businesses," said the Treasury.

“That is why we’ve introduced an extensive range of measures to support challenger banks: we’ve put competition at the heart of the regulatory system, significantly reduced barriers to new banks entering the market, and made sure that all banks - big or small - can access the payment systems on fair terms."

“We’re also creating a tax regime for the banking sector that is sustainable and fair, with any bank that makes less than £25m profit a year exempt from the banking tax surcharge.”

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