2013 Budget: Implications for Financial Institutions

On 20 March 2013, George Osborne, Chancellor of the Exchequer, delivered the 2013 Budget.

The below sets out some of the key measures and policy of particular interest to financial service providers. HMRC has also published its 2013 Budget letter for the financial services sector- please contact us if you would like a break down of the contents of the HMRC letter.

Reform of the financial system

The 2013 Budget Report reiterates existing measures and initiatives to reform the UK financial system, including the government's intention to seek to amend the Financial Services (Banking Reform) Bill to include provisions giving regulators the power to enforce full separation between retail and wholesale banking in a specified group (subject to HM Treasury approval).

Banking code of practice

Following consultation, the government will introduce legislation in the Finance Bill 2013 to provide for HMRC to publish an annual report, from 2015, on the operation of the Code of Practice on Taxation of Banks. This report may include the naming of any bank that HMRC considers not to be complying with the Code. The government will consult on the governance process around determining non-compliance and the nature of the report to be published by HMRC.

FSA review of barriers to entry for banks

The FSA will be publishing its review of regulatory barriers to entry and expansion in UK banking shortly. As a result of the review, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) will make major changes to the way they deal with new and existing small banks. The authorisation process for becoming a bank will be quicker and easier and there will be a comprehensive series of changes to the capital and liquidity rules to level the playing field for new banks. The changes will make a significant difference to the ease with which challengers can enter the UK banking system.

Bank levy

The 2013 Budget Report confirmed that, to take account of the benefit to the banking sector of the additional reductions in corporation tax, the rate of the bank levy will increase to 0.142% (for long-term equity and liabilities) and 0.071% (for short-term liabilities) from 1 January 2014. This increase was announced before 2013 Budget.

In addition, as announced in the 2012 Autumn Statement, the Finance Bill 2013 aims to clarify that foreign bank levies do not qualify for UK tax deductions. The full rate is currently set at 0.130%. HMRC has published a TIIN on the bank levy 2014 rate change alongside the 2013 Budget.

Foreign bank levies

As announced in the 2012 Autumn Statement, the government will legislate in the Finance Bill 2013 to ensure that, from 1 January 2013, foreign bank levies paid by a foreign banking group trading in the UK cannot be claimed as a deduction against UK corporation tax and income tax. Transitional arrangements will also make clear that a claim to double taxation relief in respect of a foreign bank levy will prevent that foreign bank levy from being deducted against corporation tax and income tax.

Tax treatment of regulatory capital

As announced on 26 October 2012, the government will introduce legislation in the Finance Bill 2013 to clarify that the coupon on tier 2 debt capital that is already in issue, or yet to be issued, will be deductible for the purposes of the bank computing its profits for corporation tax purposes.

In addition, the government will legislate to clarify that banks' additional tier 1 debt capital instruments already in issue, or yet to be issued, will be similarly deductible for the purposes of a bank computing its profits for corporation tax purposes.

Tax treatment of building societies' capital instruments

Following consultation, regulations have been made so that the tax treatment of new Basel III compliant building society capital instruments "core capital deferred shares" will be the same as equivalent share capital from 1 March 2013.

Payment systems: Card payments for SMEs

The government has secured a commitment from the payment card industry to reduce the time it takes for credit and debit card payments to reach the bank accounts of small and medium sized enterprises (SMEs) by up to three days, by using the Faster Payments System to process payments.

US Foreign Account Compliance Act (FATCA) implementation

Legislation will be included in the Finance Bill 2013 to implement the UK-US agreement to improve international tax compliance and to implement the US Foreign Account Tax Compliance Act (FATCA). Final regulations will be issued shortly. The Isle of Man, Guernsey and Jersey have agreed to enter into similar automatic exchange agreements with the UK.

Offshore Funds (Tax) Regulations: amendments

The government will make changes in the operation of the Offshore Funds (Tax) Regulations 2009 to close an avoidance loophole with effect from 20 March 2013.

Further regulations to help ensure investors in offshore reporting funds are taxed on the correct proportionate share of income will be published in draft form for comment.

HMRC has published a TIIN on amendments to the Offshore Funds (Tax) Regulations 2009 alongside the 2013 Budget.

Business Bank

Last year, the government announced it would establish a state investment bank, known as the Business Bank, to help small and medium-sized enterprises (SMEs) access finance. The government published the first business strategy for the Bank on 21 March 2013. This sets out an accelerated timetable for how it will deploy £1 billion of new capital to improve access to existing SME support schemes and develop a lasting new institution to support SME growth by the end of 2014.

The government also announced that the Bank will (among other things):

• Launch a £300 million investment scheme in spring 2013 to invest alongside private investors in financial institutions and non-bank lending channels to help diversify and expand the supply of lending to SMEs and mid-sized businesses.
• Support more lenders to increase SME lending through the Enterprise Finance Guarantee scheme by maintaining the lenders' guarantee cap of 20%.
• Provide support through £30 million of funding for a trade credit pilot with Kingfisher to extend credit to wholesale customers of B&Q, TradePoint and Screwfix.

SME credit database

The government announced that it will investigate options for improving access to credit data on SMEs to make it easier for new lenders to assess prospective loans to small businesses.

Asset purchase facility

The government has confirmed that the asset purchase facility will remain in place for the 2013-14 financial year. Since 2 February 2009, under the asset purchase facility, a wholly owned subsidiary of the Bank of England has been authorised by the government to purchase "high quality private sector assets", including corporate bonds, syndicated loans and certain asset-backed securities created in "viable securitisation structures" from banks, other financial institutions and financial markets. At present, the ceiling on asset purchases is £375 billion.

Funding for Lending Scheme

The government reported that there are currently 39 banks and building societies (who make up over 80% of the stock of loans) participating in its Funding for Lending Scheme (FLS), the aim of which is to encourage banks and building societies to increase their lending to UK households and non-financial companies. The government contends that the FLS has contributed to an increase in the availability of credit and a reduction in wholesale funding costs, reducing the borrower's lending cost. The government also announced that HM Treasury and the Bank of England are actively considering whether there are potential extensions to the FLS.

Lender guarantee scheme for residential mortgages

While the FLS aims to increase lending to households, the government has announced that it will create a mortgage guarantee scheme to increase the availability of mortgages on new or existing properties for those with small deposits of between 5% and 20%. The Help to Buy: mortgage guarantee scheme will be a temporary scheme that will run for three years from January 2014. It aims to increase the supply of high loan-to-value residential mortgages to individuals by offering a government guarantee to certain lenders who offer mortgages that meet particular criteria.

HM Treasury provided a technical paper outlining how it intends the scheme would work. However it cautioned that the scheme, as outlined, was not in its final form and will be developed following further analysis and discussion with the industry.

Stamp duty on shares in AIM and ISDX listed companies

Following consultation, the government plans to abolish stamp taxes from April 2014 on dealings in shares in companies listed on growth markets including the Alternative Investment Market (AIM) and the ISDX Growth Market.

Shares and other securities may form part of a lender's security package, which may, in some circumstances, constitute a dealing in such instruments.

Stamp duty abolished on dealings in units in collective investment schemes

From 1 April 2014, the government will abolish the stamp duty reserve tax (SDRT) charge on surrenders of units in collective investment schemes (CISs). A CIS (and other forms of unit trusts) may be used as a property-holding vehicle in some finance structures as a means to enable participants in that scheme to receive profits or income out of property. Currently SDRT is charged at 0.5% on the market value of a unit if it is "chargeable security" (as defined in the legislation) and is surrendered.

High-value residential property held by non-natural persons

Initiatives to target high-value residential property owned by non-natural persons (NNPs) including companies, so-called "enveloped" property continue to develop. However the government has sought to address concerns that these measures might catch properties that were held by NNPs for genuine commercial reasons, and not simply for minimising tax liability. Some reliefs reflecting commercial concerns have already been announced, but the 2013 Budget confirmed that further reliefs will be brought in, covering, among others:

• Property development, investment rental and trading businesses.
• Residential properties that are open to the public for at least 28 days a year on a commercial basis.
• Residential properties held for employee accommodation.
• Residential properties owned by a charity and held for charitable purposes.
• Working farmhouses.

Asset finance: capital allowances

Legislation will be introduced in the Finance Bill 2013 to remove the general exclusion to first year capital allowances for expenditure incurred on railway assets and ships. These changes were scheduled to have effect from 1 April 2013. The availability (or otherwise) of capital allowances is often a key factor in the choice of financing structure, such as leasing, when acquiring assets.

Asset finance: chargeable gains and foreign currency losses extended to disposals of ships and aircraft

The Finance Bill 2013 is to include legislation allowing chargeable gains (or allowable losses) arising on disposals of ships, aircraft and interests in shares to be calculated in a foreign (that is, non-sterling) currency and the gain (or loss) then converted into sterling (using the exchange rate at the time of the disposal).

For further information, please contact:

John North, Head of Corporate

Angela Stallard, Corporate Partner.

Emma Boulter, Corporate Solicitor.