As part of the retail banking market investigation, the Competition and Markets Authority (CMA) has published a working paper on the potential impacts of the bank corporation tax surcharge (CTS) that has been effective from January 2016, and also of changes to the bank levy.  The CMA’s provisional findings noted that a number of building societies and smaller banks had expressed significant concerns with the proposed surcharge.

The CMA concludes that there is no strong evidence at this time that the introduction of the CTS combined with the changes to the bank levy will deter entry or expansion or will result in banks exiting the market.  However, it notes that the full impact of the tax changes may take time to emerge.  The bank levy was targeted at systematically important banks, so smaller banks, including new entrants, were not subject to the levy.  As a result of the introduction of the CTS and the changes to the bank levy, the tax advantage of smaller banks over banks that are subject to the bank levy has been reduced.  However, the six largest retail banks continue to pay higher effective rates of tax than smaller banks.

The CMA has found aspects of the design of the CTS may lead to differential effects across retail banks, which, while not immediately evident now, might impact on competition between banks in the future.  However, while the tax regime continues to favour smaller banks (including new entrants), the overall effect, compared with the pre-2016 position, is that the tax advantages of smaller banks have been reduced as a result of the changes to the bank levy and the introduction of CTS.  Therefore, any effect that these tax advantages had in off-setting the barriers to entry and expansion such banks face are likely to be reduced.

The CMA is seeking comments on the paper by 11 March 2016.