Total Tax Contribution of UK Financial Services Sixth Edition

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1 Total Tax Contribution of UK Financial Services Sixth Edition RESEARCH REPORT CITY OF LONDON CORPORATION Report prepared for the City of London Corporation by PwC

2 Total Tax Contribution is published by the City of London. The author of this report is PricewaterhouseCoopers LLP. City of London Corporation, December All rights reserved. City of London PO Box 270, Guildhall London EC2P 2EJ This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, the authors and distributors do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. In this document, "PwC" refers to the UK member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see for further details.

3 Contents Executive summary... 1 Purpose and outline of the study... 2 Estimated contribution of the FS sector in the UK... 4 Trends in tax payments... 7 Profile of taxes paid by survey participants Employment taxes Corporation tax Total Tax Rates Results for different parts of the sector Appendices Appendix 1 - List of UK taxes borne and collected by financial services companies Appendix 2 - Data provided by 41 FS companies taking part in the study.. 27

4 Executive summary The key findings from this sixth study show that, for the financial services (FS) sector in the UK in the year to 31 March 2013: The sector paid an estimated amount of total taxes, (including both taxes borne and taxes collected), in the region of 65.0bn, or 11.7% of total UK government tax receipts. This is 3.2% higher than our estimate of the contribution of the UK financial services sector in 2012 ( 63.0bn; 11.6% of the total UK government tax receipts). According to government figures, total corporation tax paid by the FS sector in the period was 6.5bn, up from 5.4bn in the prior year. This accounts for 16.4% of total UK corporation tax receipts. Corporation tax remains the third largest tax borne (19.0% of total taxes borne) for the survey participants. 1.6bn of bank levy was paid by the FS sector as a whole according to Government figures. 1.1m people (3.8% of the UK workforce) were employed by the FS sector in the years to 31 March 2013 and 31 March Estimated employment taxes generated by the sector increased to 28.4bn, 12.0%of government receipts from employment (2012: 27.7bn; 11.8%) and constitute both the largest taxes borne and collected. We estimate that FS companies pay 26,674 in employment taxes on average for each employee. The study reflects a changing tax system and the impact of the financial crisis over the six studies. In 2013, corporation tax represents 19.0% of taxes borne (2007: 40.8%), employers NI represents 34.9% ( %) and irrecoverable VAT 22.1% (2007: 19.1%). In 2007, for every 1 of corporation tax there was 1.45 of other taxes, in 2013 the figure is Twenty six companies in the sample spent a total of 5.0bn on capital expenditure, representing 4.1% of the total UK business capital expenditure in the period. At a sub-sector level, for the survey population, the banks are the largest payers of tax and are also the largest employers. The banks account for 40% of participants by number, 77.4% of taxes borne and 70.2% of taxes collected. They also employ 71.9% of people employed by the companies in the study. 1

5 Purpose and outline of the study Estimating the size of the FS sector s tax contribution This is the sixth study we have carried out for the City of London Corporation. It looks at the Total Tax Contribution (TTC) of the FS sector in the UK for the year to 31 March The purpose of all six studies is to show the size of the contribution that the FS sector makes in tax revenues in the UK, and how this has changed over time and been affected by the economic climate and changes in Government policy. The Total Tax Contribution methodology The studies use the PwC TTC methodology, which looks at all the different taxes that companies pay and administer, including corporation tax, employment taxes, VAT, and other taxes. The study reports on the total taxes that are borne by these companies, and also on the total of the taxes they administer and collect on behalf of the Government. The distinction between taxes borne and taxes collected The TTC methodology makes a distinction between taxes borne and taxes collected. Taxes borne are all the taxes levied on a company, which are its cost and will affect its results. They include corporation tax, employers national insurance contributions (NIC), and business rates. Taxes borne are a company s direct contribution to tax revenues. Taxes collected include employee income tax and NIC administered through the payroll, and the insurance premium tax charged to customers. These are the taxes of employees and customers respectively, but are collected from them by the company and paid over to the Government. Taxes collected are generated by the company s business activity and are part of its indirect contribution to tax revenues. How we collected the data This sixth study has been carried out using data provided by 41 FS companies on all their UK tax payments. These companies employed 41.3% of the UK FS sector workforce and include retail banks, investment banks, insurers, asset managers, real estate companies and other FS sector companies. The results are a measure of their cash taxes paid, covering both taxes borne and taxes collected. The results provide information which would not otherwise be in the public domain, since this is not information the companies are required to disclose in their financial reports. PwC has anonymised and aggregated the data provided by the FS companies to produce the study results. PwC has not verified, validated, or audited the data and cannot therefore give any undertaking as to the accuracy of the study results. Where we refer to data published by the Government and HMRC, this is clearly indicated. A note on the time period covered This sixth study looks at tax payments by FS companies in their accounting period ended in the tax year to 31 March 2013; for the majority (80%), this is the calendar year to 31 December The first study we carried out looked at tax payments by FS companies in their accounting year ended in the tax year to 31 March The six studies therefore measure years covering before, during and after the financial crisis; and the impact of these events on UK tax payments by the sector can be seen in the results. All six studies use the same methodology and we are therefore able to compare the results. 2

6 Recent UK tax changes This sixth study shows the impact of rate changes in UK taxes during the year. The changes that have occurred to the UK tax system and which might be expected to have a significant impact on the total tax contribution of the FS sector in the UK are: The main rate of UK corporation tax was reduced from 26% to 24% from 1 April The bank levy was introduced in 2011 and is intended to raise 2.5bn a year from banks operating in the UK. The rate of the bank levy has gradually increased each year since its introduction. By the end of 2011, the main rate of bank levy was 0.075%. It rose to 0.105% in 2012 and to 0.130% in The threshold above which the 40% rate of income tax applies was lowered from 35,000 to 34,370 while the personal allowance was increased from 7,475 to 8,105. 3

7 Estimated contribution of the FS sector in the UK Total Tax Contribution for 2013 From the details of the tax payments provided by the companies participating in our 2013 study, we estimate that the FS sector in the UK made a Total Tax Contribution of around 65.0bn in the year to 31 March The 41(2012:39) companies taking part in the study reported total taxes borne of 10.9bn (2012: 9.9bn), and total taxes collected of 14.3bn (2012: 13.1bn). As shown in Figure 1, extrapolating from these figures we have estimated total taxes borne for the financial services sector as a whole of 24.8bn (2012: 23.8bn), and taxes collected of 40.2bn (2012: 39.2bn). Adding taxes borne and taxes collected together gives an estimated Total Tax Contribution for the sector of 65.0bn (2012: 63.0bn), and this represents 11.7% (2012: 11.6%) of all government receipts for all taxes. 1,2 The totals for corporation tax and bank levy for the whole FS sector are not extrapolated from survey data, but are taken from published government figures. Figure 1 Total Tax Contribution of the FS sector in the UK Financial year to 31 March 2013 FS companies in the study Extrapolated to the FS sector % of government receipts billions Taxes borne Corporation tax (a) 16.4% (c) Bank levy (b) 100% (d) Other Total % Taxes collected % TTC % (a)(b) Actual figures for the FS sector from government statistics (c)(d) Percentage of receipts for corporation tax and bank levy 1 Government receipts are from Office for Budget Responsibility, Economic and Fiscal Outlook, December 2013 and cover all taxes, including income tax, capital gains tax, inheritance tax, council tax, etc. 2 Extrapolation is based on government figures for corporation tax and bank levy receipts from the sector as shown in HMRC T11.1, as well on the trend data for the companies participating in the study. Extrapolation uses the ratios of (1) CT and bank levy to taxes borne; and (2) CT and bank levy to taxes collected for different parts of the sector, as established in the study. Extrapolation is an estimate only, apart from corporation tax and bank levy, where actual figures are included. 4

8 Trends in Total Tax Contribution Figure 2 shows the Total Tax Contribution of the FS sector, as estimated in the six studies, both as absolute amounts and as a percentage of government tax receipts. The Total Tax Contribution has increased by 3.2% since last year. The increase in total taxes borne is due largely to the increase in corporation tax. Increases in taxes collected are due to increases in employee income taxes, employee NIC and taxes deducted at source. Looking at the previous years, the estimated Total Tax Contribution fell by 9.4% between 2007 and 2009, driven mainly by lower corporation tax payments. The Total Tax Contribution then fell a further 13.0% between 2009 and 2010, again driven by lower corporation tax, but also reflecting other factors such as job losses in the sector and the temporary cut in the VAT rate to 15%. In 2011, the estimated Total Tax Contribution rose by 18.0% compared to Higher payments of corporation tax, the introduction of the bank payroll tax, and increases in the standard rate of VAT all contributed to the increase. The overall amount of the estimated Total Tax Contribution remained stable between 2011 and The fall in taxes borne between 2011 and 2012 is due largely to the drop in corporation tax payments, partly explained by the reduction in the corporation tax rate and the end of bank payroll tax. Figure 2 Total Tax Contribution of the FS sector in the UK Comparison of the six study results bn % % % 11.6% 11.7% 12.1% % 14.0% 12.0% 10.0% % % % % % Taxes borne Taxes collected FS sector as a percentage of government receipts Monetary figures refer to amounts of taxes borne and collected together. 5

9 Wider economic contribution For the second year we asked companies to provide information on their wider economic contribution in the form of capital investments and research and development expenditure. Twenty six companies provided data on their capital expenditure in the period under review. In total these 26 companies spent 5.0bn representing 4.1% of the total UK business capital expenditure in the period. Twenty two companies provided data on research and development expenditure. The figure of 308m for these 22 companies represents 1.8% of annual UK business research and development spending. 6

10 Trends in tax payments Trends between 2012 and 2013 The extrapolation for the FS sector is performed at the level of taxes borne, taxes collected and those taxes for which details of taxes paid are available from the Government for the FS sector as a whole. In order to understand the changes in the separate taxes that make up the taxes borne and the taxes collected, and the impact that these might have on the FS sector as a whole, we can compare data for the 34 FS companies that participated in both the 2012 and the 2013 studies (figures in brackets relate to the 35 companies participating in both the 2011 and 2012 studies). Taxes borne As shown in Figure 3, total taxes borne increased by 4.6% overall (2012: 4.4% decrease) for the companies in both the 2012 and 2013 studies. Figure 3 shows how particular taxes contributed to this trend. For the companies included in the trend corporation tax payments increased, accounting for 0.9 percentage points of the overall increase in taxes borne. The bank levy paid by 12 banks in the study increased total taxes borne by 4.9%. The increase in bank levy is due largely to the timing of the introduction of the charge with the first payments of the levy being due only in the second half of Many banks in our previous study would not have made a full year of payments when completing our previous survey, whereas they have made a full year of payments in the current study. It is worth noting that government figures show the total raised by the bank levy has remained consistent across 2012 and In addition, there was an increase in the rate of the bank levy between 2011 and Taxes collected As shown in Figure 3, total taxes collected increased by 2.4% overall (2012: 5.9%) between 2012 and 2013 for the companies in both studies. The majority of the increase is due to the increase in taxes deducted at source, mainly on interest and annuities paid by banks and life insurers respectively. This equates to a 2.7% increase in total taxes collected. There were small increases in employee income tax deducted under PAYE and employees NIC resulting in small increases in total tax collected. Small decreases in net VAT paid and stamp duty reserve tax collected were also observed as shown in Figure 3. 7

11 Figure 3 Trends in taxes borne and collected 2012/2013 % increase/decrease Taxes borne Corporation tax 0.9% Bank lev y 4.9% Employ ers' NIC -0.5% Irrecoverable VAT -0.6% Other taxes borne -0.1% Total increase 4.6% Taxes collected Employ ee income tax 0.6% Employ ees' NIC 0.2% Net VAT -0.4% Tax deducted at source 2.7 % Other taxes collected -0.7% Total increase 2.4% Trends between 2007 and 2013 Seventeen (2012: 17) companies from the 2013 study also participated in the first study in 2007, so we can look at the trends for this smaller group over those seven years, spanning the period before and after the financial crisis. 3 Figure 4 shows the trends in taxes borne and collected for the smaller group since the first study was carried out in Total taxes borne overall for the 17 FS companies in both studies are still 12.2 % lower than in 2007, and this is due to lower corporation tax payments. The statutory rate of corporation tax has decreased from 30% in 2007 to 24% in In addition the 2013 corporation tax payments are affected by the legacy of the financial crisis. Increases in irrecoverable VAT, employers NIC and the introduction of the bank levy partly offset the fall in corporation tax. Taxes collected are 4.2% higher than in 2007 with the increase being due to changes in PAYE. 3 For the companies participating in both the 2012 and 2013 studies, and in both the 2007 and 2013 studies, trends in the tax payments have been calculated on a like-for-like basis. Figures are included only where the same companies provided data for the same taxes in both years. 8

12 Figure 4 Trends in taxes borne and collected 2007/2013 Taxes borne Corporation tax Bank levy Employ ers NIC Irrecoverable VAT Other taxes borne Total decrease Taxes collected Employ ee income tax Employ ee NIC Net VAT Tax deducted at source Other taxes collected Total increase % increase/decrease -43.4% 14.2% 3.8% 12.9% 0.3% -12.2% 5.9% -0.7 % -1.3% 1.6% -1.3% 4.2% Figure 5 shows the trend since 2007 inn the total amount of corporation tax, taxes borne and taxes collected paid by the 12 companies that have participated in all years of the study, taking 2007 as the base year. The impact of the financial crisis can be seen particularly in the 2009 and 2010 studies. For this sample of companies, there iss a small increase in corporatioc n tax from 2012 to 2013 which was offset by a small reduction in other taxes. Taxes borne and collected are relatively constant for those companies between and Figure 5 Trend in taxes borne andd collected for companies thatt have participated in all yearss of the study 9

13 Over the seven years from 2007 to 2013, the profile of taxes borne has changed for FS companies as shown by Figure 6. In 2007 corporation tax was 40.8% of total taxes borne, with employers NIC accounting for 21.3%. In 2013, corporation tax is 19.0% of taxes borne and employers NIC is 34.9%. In part this is due to changes in the government s tax regime; there have been increases in the rates of employers NIC from 12.8% to 13.8% and in irrecoverable VAT from 17.5% to 20% between 2007 and In addition, the legacy of the financial crisis is reflected in the level of corporation tax payments in 2013, combined with the lower statutory corporate tax rate of 24% at the start of 2013 compared to 30% in Figure 6 The changing profile of the tax system from 2007 to % Other taxes, 1.4% Other taxes, 0.9% 90% 80% 70% 60% 50% 40% 30% 20% 10% Irrecoverable VAT, 19.1% Employers NIC, 21.3% Stamp duties, 10.8% Business rates, 6.5% Corporation tax, 40.8% Irrecoverable VAT, 22.1% Bank Levy, 7.2% Employers NIC, 34.9% Stamp duties, 6.3% Business rates, 9.6% Corporation tax, 19.0% 0%

14 Profile of taxes paid by survey participants As well as looking at the amounts of each tax borne or collected by the study participants, we have considered the relative proportions of the different taxes in more detail. Profile of taxes borne Figure 7 shows the profile of taxes borne for companies providing data for the study. All of these taxes are a direct cost to these companies and have an impact on their financial results. Aside from corporation tax, many are above the line taxes that are deductible in calculating profit before tax, and will not be separately disclosed in financial statements. Total taxes borne are the direct tax contributions of FS companies to the public finances. Figure 7 shows that corporation tax is just under a fifth (19.0%, 2012: 21.9%) of the tax cost on average. Compared to the previous year there has been a small reduction in corporation tax as a percentage of taxes borne, even though the absolute amount of corporation tax paid has increased. The reduction in corporation tax as a proportion of total taxes borne is due to the increase in the proportions of bank levy, business rates and stamp duties. For every 1 of corporation tax paid there is another 4.26 (2012: 3.57) paid in other taxes borne. Figure 7 Taxes borne by financial services companies Other taxes 0.9% Irrecoverable VAT 22.1% Corporation tax 19.0% Bank levy 7.2% Business rates 9.6% Stamp duties 6.3% Employers NIC 34.9% Chart shows the average result for companies in the study. 11

15 Employer s NIC is the largest tax borne, at 34.9% (2012: 35.2%) of taxes borne on average. The companies in the study are large employers, together employing 461,254 (2012: 497,491) staff. Payment of the bank levy in the 2013 study period represents 7.2% (2012:4.5%) of taxes borne on average, though this tax is only borne by the banks. Irrecoverable VAT is another large tax cost for the financial services sector at 22.1% (2012: 24.1%) of total taxes borne on average. We have extrapolated from the figures provided in the study to estimate irrecoverable VAT for the financial services sector as a whole as being in the region of 5.5bn to 6.5bn. 4 Profile of taxes collected Figure 8 shows the profile of the taxes collected by the companies in the study. These are the taxes collected from employees and customers and are not a direct cost to the companies themselves, other than the cost of administration. The companies are responsible for administering these taxes and paying the amounts collected over to the Government, and we are therefore able to measure the cash contribution to the public finances. Taxes collected arise from the jobs created and the services provided to customers by FS companies and are part of their indirect contribution to tax revenues. Taxes collected are 1.31 (2012: 1.32) times the size of taxes borne, and for every 1 of corporation tax paid by financial services companies there is another 6.92 (2012: 7.79) in taxes collected. Figure 8 Taxes collected by financial services companies Insurance premium tax 5.6% Net VAT 11.8% Tax deducted at source 14.0% Stamp Duty Reserve Tax 4.2% Employees NIC 9.3% Employees' income tax 55.1% Chart shows the average result for companies in the study. 4 Extrapolation uses the ratio of irrecoverable VAT to taxes borne (excluding bank levy and corporation tax), averaged across the different parts of the sector. Extrapolation is an estimate only. 12

16 Employees income tax and NIC deducted under PAYE are the largest taxes collected, and together represent 64.4% (2012: 61.2%) of the total on average. The financial services sector also administers and collects VAT and several other taxes on behalf of Government. Tax deducted at source is 14.0% (2012: 16.2%) of the total on average, and includes tax deducted from interest paid to customers by the retail banks, and from annuities paid by life insurers. Insurance companies (non-life insurers) administer insurance premium tax, and investment banks administer stamp duty reserve tax. Total Tax Contribution profile Figure 9 combines taxes borne and taxes collected to show the average Total Tax Contribution profile for companies in the study. Employment by the sector generates the largest amounts of tax paid into the public finances. NIC (employer and employee) and employee income tax under PAYE are 48.9% (2012: 48.3%) of the total. Corporation tax is less than a tenth (8.8%, 2012: 9.5%) of the Total Tax Contribution; and there are many other important taxes both borne and collected by FS companies. Figure 9 Total Tax Contribution of financial services companies Insurance premium tax 4.0% VAT 17.7% Others 7.4% Corporation Tax 8.8% Tax deducted at source 10.1% Bank levy 3.1% Employment taxes 48.9% Chart shows the average result for companies in the study. 13

17 Employment taxes Extrapolation of the employment taxes paid by the FS sector Employment is an important way in which the financial services sector contributes to the UK economy. Government figures show that the sector employs over 1.1 million employees, which is 3.8% (2012: 3.8%) of the total UK workforce (both private and public sector together). 5 Using the data provided for this study, we estimate that employment in the FS sector generates total employment taxes of 28.4bn (2012: 27.7bn) (see Figure 10). 6 We estimate this to be 12.0% (2012: 11.8%) of government tax receipts from employment. 7 Figure 10 shows the employment taxes for the FS companies taking part in the study, totalling 12.9bn. This includes the employer NIC totalling 3.3bn, and employee NIC and income tax deducted under PAYE totalling 9.6bn. Extrapolating from these figures, we estimate total employment taxes borne by the sector of 6.7bn (2012: 6.3bn) and total employment taxes collected of 21.7bn (2012: 21.4bn). Employment taxes are the largest taxes borne and collected by FS companies and these taxes arising from the employment generated by the sector are a major contribution to the public finances. Figure 10 Employment taxes borne and collected by the financial services sector in the UK FS companies in Extrapolated the study to the FS sector billions Employment taxes borne Employer NIC 3.3 (a) 6.7 Employment taxes collected Employee PAYE and NIC Total employment taxes (a) Includes benefit tax (PAYE agreements) of 46.7m 5 Office for National Statistics, Labour market statistics, September 2013, employment table EMP02 6 Extrapolation has been carried out by multiplying the average employers NIC, employees NIC and PAYE for the employees in the study to the total number of employees in the FS sector. Extrapolation is an estimate only. 7 Calculation is extrapolated employment taxes as a percentage of government receipts for income tax under PAYE, all NIC receipts. 14

18 Wages and taxes per employee The FS sector employs skilled, well-paid, employees. Across all employees in the study, the average wage 8 was 54,830, an increase of 4.6% (taking only those peoplee employed by companies that participated in the study in both years).. The UK national average for the period was 24,115 (2012: 24,093). 9 Official figures for wages and salaries in the FS sector and PwC analysis indicate that the average wage in 2011 was 45,000 to t 55, Companies whichh employedd 85.0% of the employees paid an average wage per employee between 25,0000 and 55,000. Employment taxes for each employee are 26,674 on average, 11 taking amounts borne and collected together. These are an indicator of the t direct benefit to the Exchequer for each job created or maintained in the sector. For thee companies which together employed 64.8% of employees, the average employment taxes per employee are between 10,000 and 30,000. Trends in employment and employment taxes Figure 11 shows the average trends between 2012 and 2013 for the 27 companies that provided relevant dataa in both studies. Employee numbers fell by 2.7% (2012: 1.0%), but wages and employment taxes increased in thee same period. Figure 11 Trends in employment and employment taxes 2012/2013 Chart shows the average trend for employeess in the study. 8 The average wage was calculated by takingg the total wages and salaries for the survey population and dividing it by the total number of employees within that population. Participants were asked to give a figure for total UK wages and salaries paid, including bonuses. 9 Office for National Statistics - average weekly earnings 10 Financial services sectors wages and salary y and compensation figures publishedd by Eurostat. 11 The average employment tax per employee was calculated by taking the total employmentt taxes for the survey population and dividing it by the total number of employees in the population. 15

19 Corporation tax The FS sector paid more corporation tax than North Sea companies Government figures show the importance of the FS sectorr for corporation tax receipts. Figure 12 shows that in 2013,, the corporation tax paymentss of the financial services sector are higher than those of North Sea companies, due in part to a reduction in oil prices and in production. In 2013, FS companies paidd 16.4% (2012: 12.8%) of total corporation tax receipts, and North Sea companies 12.1% (2012: 21.9%).. 12 Figure 12 Government corporatio on tax receipts by business sector The trend in corporation tax Government receipts from corporation tax have been heavily affected by economic factors such as the t financial crisis and subsequent recession, as well as the reduction in the main corporation n tax rate from 30% inn 2007/2008 to 28% in 2008/2009, 26% in 2011/2012 and 24% in 2012/2013. The total from all business sectors s in 2013 is 11.0% below that in Figure 13 shows the pattern of corporation tax receipts from the FS sector for all years from 2001 (tax year to Marchh 2001). It shows a cyclical pattern, with payments previously dropping to thee current levels in 2003 and Although corporation tax paid by the FS sector fell by b 26.1% between 2011 and its lowest point in 2012, this largely reversed with an increase of 21.1% % from 2012 to For the FS companies in ourr studies, corporation tax payments havee increased on average in the last year. For the companies in both the 2012 and 2013 studies, corporation tax payments increased i by 11.9%. For the companies which took part in the first study, corporation tax payments in 2013 were however onn average nearly 60% below those in This compares to a decrease in Government receipts of corporation tax from the FS sector of 46.8% over the samee period. 12 HMRC National Statistics, Corporation Tax - Table T

20 Figure 13 Government corporatio on tax receipts from the financial services sector Trends in corporation tax and profit before tax Corporation tax is linked to profitability. Figure 14 compares the trends in average corporation tax and in average profitt before tax for the same companies. Between 2011 and 2012 there was a fall in bothh profits and corporation tax ass profits were affected by the Eurozone crisis in andd the provisions related to payment protection insurance. In 2013 corporation tax payments increased from their lowest level in 2012 while profit remained broadly constant. Corporation tax receipts from life insurance companies are a significant part of the overall increase in corporation tax forr FS sector. The calculation of corporation tax liabilities for life insurance companies is complex, involvingg both policy holder and shareholder calculations and does not always match movements inn profits. Companies provided additional dataa this year on the items reconciling accounting profit to taxable profit. The major item in this reconciliation was the impact of losses brought forward from previous years. This was offset by costs which are not deductible for corporation tax purposes. 17

21 Figure 14 Trend in corporation taxx payments and profit before tax for FS companies Chart shows the average trend for companiess in the study. 18

22 Total Tax Rates The average Total Tax Rate for FS companies in the 2013 study is 42.5% 13 (2012: 39.5%). This is 3.0 percentage points higher than the Total Tax Rate in the 2012 study, and 6.1 percentage points higher than in 2007, before the financial crisis. The Total Tax Rate is a measure of the cost of taxes in relation to profitability and calculates the total taxes borne as a percentage of profits before all those taxes borne. Only taxes borne are included in the Total Tax Rate calculation; taxes collected are not included. Figure 15 shows the average Total Tax Rate in each of the six studies. In the 2009 study, the average rate rose sharply above the rate in the first (2007) study, carried out before the financial crisis. This was due to falling profits between the two years. In this period corporation tax payments fell with declining profit, but payments of the other taxes borne, which are not so directly linked to profits, remained more stable and the Total Tax Rate rose as a result. As profits have recovered since the 2009 study, Total Tax Rates have reduced, but are still above the 2007 levels. The fall between 2011 and 2012 reflects both falling profits and falling taxes borne. The increase in the Total Tax Rate in the last year is a combination of broadly stable profits along with an increase in taxes borne. Figure 15 Total Tax Rates for financial services companies Comparison of the six study results 60% 57.4% 50% 40% 36.4% 48.5% 47.5% 39.5% 42.5% 30% 20% 10% 0% Chart shows the average results for companies in each study. 13 The average Total Tax Rate was 42.5%, the median average 31.0%, and the range 0.8% to 154.6%. This excludes two companies with rates exceeding 200%. Total Tax Rates above 100% may arise in loss making companies. (2012: The average Total Tax Rate was 39.5%, the median average 30.4%, and the range 2.4% to 110.2%. This excludes three companies with rates exceeding 200%.) 19

23 Taxes paid, when measured against the revenues (turnover) of FS companies rather than their profits, are a more stable percentage. Here we include both taxes borne and collected, as an indication of thee size of the Total Taxx Contribution of these companies in relation to the size of their business. On average, the Total Tax Contributio on was equivalent in size to 21.1% (2012: 20%) of revenues in 2013, with a split of 7.3% taxes borne and 13.8% taxes collected 14 (2012:( 6.8% taxes borne and 13.2% taxes collected). Figure 16 shows the comparison with previous studies. These figures are broadly consistent withh the decrease in turnover, increases in taxes borne and increasee in taxes collected that we have seen in the survey population. Figure 16 Total Tax Contribution ass a percentage of revenues forr financial services companies Comparison of the six study resultss Chart shows the averagee results for companies in each study. 14 The average TTC to revenues is 21.1%, the median average 21.5%, and the rangee 1.1% to 46.4%. This excludes one loss-making company with a rate exceeding 100%. (2012: The average TTC to revenues is 20.0%, the median average 16.8% %, and the range 0.8% to 44.3%. This excludes e onee company with a rate exceeding 100% %). 20

24 Results for different parts of the sector Overview of the companies that participated The companies that participated in the 2013 survey represent a significant part of the FS sector in the UK. In total, 41 FS companies provided data on their UK tax payments for the 2013 study (2012: 39) and together they employed 41.3% (2012: 44.5%) of the total employees in the sector. The breakdown of these by sector is shown below: Figure 17 Survey participants by sector Retail and commercial banks 8 20% Investment banks 8 20% Insurance companies 10 24% Asset managers 5 12% Real estate companies 5 12% Other FS companies 5 12% Total % The participants included both UK listed (66%), foreign listed (29%), and privately owned/mutual companies (5%). Given the range of sub-sectors, this section provides some results separately for three sub-sectors banks (including retail and investment banks), insurers (life and general insurance), and all other financial services. The banking sector accounts for the greatest share of TTC Figure 18 shows an analysis of the Total Tax Contribution figures (taxes borne and collected together) for the 41 companies taking part in the 2013 study split into banking, insurance and other sectors. The banks are the largest taxpayers in the sample, with 73.3% (2012: 70.2%) of the Total Tax Contribution figures, 45.9% (2012: 50.9%) coming from UK based banks and 27.4% (2012: 19.3%) from foreign banks. Figure 18 Analysis of study data by financial services sub-sector number of companies in the study and Total Tax Contribution figures. 80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 73.3% 40% 36% 24% 20.0% 6.7% Banks Insurance Others Number of companies participating TTC figures reported 21

25 Taxes borne and taxes collected by sector Figure 19 breaks down the Total Tax Contribution figures too show an analysis by sector for corporation tax, total t taxes borne (including corporation tax), and taxes collected. The insurance companies pay a greater proportion of taxes collected than they do of taxes borne. This is due, in part, to the fact that the insurance companies collect insurance premiumm tax from their customers andd pay it over to the Government. It is important to stress that Figures 17,, 18 and 19 show an analysis a only of the figures provided by the companies in the study, and so cannot be b extrapolated to the sector as a whole as the split between sub-sectors in the survey s population will differ from the sub-sector split in the t FS industry as a whole. Figure 19 Analysis of study data by financial services sub-sectors r corporation tax, total taxes borne and taxes collected As can be seen from Figure 19, of thee industries in the study, the insurance companies are the largest payers of corporation tax (51.2%, 2012: 41.9%) whereas the banks have the biggestt proportion of total taxes borne (77.4%, 2012: 76.4% %), including employer s NIC, irrecoverable VAT and bank levy, as well as corporation tax. The banks have been the t biggest payers of taxes borne in all sixx studies and this compares to 70.3% in The bankss are also the biggest collectors of taxes, with 70.2% (2012: 65.6% %) of the figures in

26 Corporation tax in the banking sectorr The figures above are only for companies included in the study. However, HM Revenue & Customs have published details of employme nt taxes and corporation tax receipts from the entire banking sector from 2006 to Figure 20 shows these figures for corporation tax together t with the total corporation tax receipts from the financial servicess sector. It is clear that lower payments byy the banks following the financial crisis have had a major impact on corporation tax receiptss from the sector. The increase in corporation tax payments by the banking sector of 66.7% between 2010 and 2011 reversed in 2012 with a 62.9% decrease and increased again in 2013 with a rise of 76.9%. In both 2012 and 2013 the banking sector paid 1.6bn of bank levy which is not included in Figure 20. The bank levy was introducedd to offset the expected reduction in corporation tax payments by banks followingg reductions in the statutory rate of corporation tax. Figure 20 Corporation tax paid byy the FS sector to HM Revenue & Customs Official Statistics 31 August 2013, Pay As Youu Earn and corporation tax receipts from the banking sector 23

27 Employment taxes by sector The banks in the study are also the largest employers and generate the largest employment taxes. Figure 21 analyses the study figures by sub-sector and shows that, for the study participants, banks employed 79.1% (2012: 77.9%) of the employees and generated 81.9% (2012: 79.9%) of the employment taxes (employer taxes borne, and employee taxes collected together). Of these taxes, 43.9% (2012: 49.2%) is from UK banks and 38.0% (2012: 30.7%) is from foreign banks. Figure % 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Analysis of study data by financial services sub-sector employee numbers and employment taxes 2.8% 6.7% 18.0% 11.4% 79.1% 81.9% Number of employees Employment taxes borne and collected Others Insurers Banks Again, these are figures only for the companies in the study. The recent HM Revenue & Customs paper also included employment tax figures for the entire banking sector for 2006 to 2013 and these are shown in Figure 22. Figure 22 Employment taxes paid by the banking sector 2006 to 2013 bn Employment taxes borne and collected 24

28 The slight increase in employment taxes paid by the banking sector between 2012 and 2013 is in line with the increase in estimated employment taxes for the FS sector as a whole as shown in Figure 10. It can also be seen from Figure 22 that the employment taxes paid by the banking sector have increased by 27% since the low point in For the last three years receipts of employment taxes from the banking sector have been greater than before the financial crisis. The following appendices detail the UK taxes borne and collected by financial services companies, and the data provided on total taxes borne and collected by the 41 FS companies taking part in the study. 25

29 Appendices Appendix 1 - List of UK taxes borne and collected by financial services companies Tax borne Tax collected Profits taxes Corporation tax Tax deducted at source 1 Property taxes Bank levy2 Business rates Stamp duty land tax Stamp duty Stamp duty reserve tax People taxes Income tax under PAYE PSA (tax on benefits) Employee s national insurance contributions Employers national insurance contributions Product taxes Net VAT Irrecoverable VAT Custom duties Insurance premium tax Air passenger duty Planet taxes Fuel duty Vehicle excise duty Landfill tax EU ETS Carbon reduction commitment Congestion charge Climate change levy 1 Tax deducted at source from, for example, interest, royalties, subcontractors, PAYE on annuities, withholding tax on Property Income Dividends and others 2 Bank levy applies to periods of account ending on or after 1 January The levy is charged on a bank's chargeable liabilities (as defined). 26

30 Appendix 2 - Data provided by 41 FS companies taking part in the study Taxes borne and collected in their accounting year ended in the year to 31 March Taxes borne millions Profit taxes Corporation tax 1,689.7 Property taxes Bank levy 1,469.5 Business rates Stamp duty land tax 93.2 Stamp duty 2.5 Stamp duty reserve tax People taxes PSA (tax on benefits) 46.7 Employers' NIC 3,246.2 Product taxes Irrecoverable VAT 3,451.2 Customs duties 0.2 Insurance premium tax 9.0 Air passenger duty 8.2 Planet taxes Fuel Duty 2.3 Vehicle excise duty 29.8 Landfill tax 0.4 EU ETS * - Carbon reduction commitment 9.6 Congestion charge* - Climate change levy 5.2 Total taxes borne 10,886.2 Taxes collected Profit taxes Tax deducted at source 2,327.2 Property taxes Stamp duty reserve tax People taxes Income tax under PAY E 8,266.5 Employee's NIC 1,302.5 Product taxes Net VAT Insurance premium tax Total taxes collected 14,293.3 Total tax contribution 25,179.5 * Data was requested from the participating companies for EU ETS and congestion charge, but the total amounts were less than 100,000 and so round to nil. 27

31 Total Tax Contribution of UK Financial Services Sixth Edition RESEARCH REPORT CITY OF LONDON CORPORATION DECEMBER 2013

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