Draft legislation to enact the UK bank levy has recently been published for comment. The proposed legislation is both complex and detailed but largely what was expected.

The levy is designed to encourage banks to adjust their balance sheets in order to move away from risky funding profiles. It will be effective from 1 January 2011. The definition of those entities caught by the new provisions is very broad. It will apply to the big UK and foreign banks and building societies operating in the UK but may also catch others engaged in the provision of banking services in the UK (anywhere within a group structure) and subsidiaries of banks which do not undertake banking activities.

Asset managers, insurance companies and private equity houses not sitting as part of banks should not fall within the regime. In practice, even where these entities sit as part of banks, the levy should not apply as the liabilities will not generally appear on the bank’s balance sheet.

For the UK banks and building societies, liability to pay the levy will be assessed using the global consolidated balance sheet. Taxable entities will be charged on their world-wide chargeable equity and liabilities, calculated according to the legislation. Non-UK banks will be charged in respect of chargeable equity and liabilities attributable to UK operations only. Certain amounts may then be excluded, including Tier 1 capital and certain protected deposits, including amounts covered by the Financial Services Compensation Scheme. There is also exclusion for high quality liquid assets which are broadly any assets that would qualify for inclusion in the FSA’s liquidity buffer.

Only the amount of such equity and liabilities over £20 billion will be charged to the levy.

A link to the Government papers can be found at http://www.hmrc.gov.uk/drafts/bank-levy.htm.

The Herbert Smith briefing on the draft legislation can be found on our website at http://www.herbertsmith.com/NR/rdonlyres/D9F25F80-1064-4F95-9730-F3A1B671BDB2/0/BankLevylegislationreleased9November2010v2.html.