UK Banks Pay Nearly Double the 23% Effective Tax Rate of the Rest of FTSE100

LONDON, December 17, 2018 - The UK’s big five banks paid tax on their profits at almost twice the rate of the rest of the FTSE100 – mostly due to the impact of the Government’s banking levy, according to research by Thomson Reuters.

The average effective tax rate of the five FTSE100 banks was 42% in 2017, nearly double the average effective tax rate of 23% paid by FTSE100 companies as a whole.

The ‘effective tax rate’ is the average rate at which a corporation’s profits are taxed. It determines how much of a business’ pre-tax profits can be distributed to shareholders as dividends or re-invested in the business for future growth.

Across all UK businesses that paid corporation tax last year, the effective tax rate was just 20.5%.*

FTSE100 companies pay on average 23.4% effective tax rate, with huge variation between sectors

The high rate of effective tax paid by FTSE100 banks is due, in part, to the bank levy that was introduced in January 2011 in response to the financial crisis. The levy is a tax on the balance sheet of banks and an 8% corporation tax surcharge on bank profits over £25 million.

As a result, UK and US banks have argued that the bank levy makes their operations uncompetitive, particularly in light of the tax cuts announced by the Trump administration.

In contrast to the high rate of tax paid by UK banks, utility companies paid an average effective tax rate of just 15%, due in part to their capital expenditure requirements. Real estate companies also had a significantly lower rate – of just 0.6% – than the FTSE100 average as a result of their tax efficient real estate investment trust (REIT) structures.
For large multinational tech firms, their effective tax rate is likely to increase in the near future. In October 2018, the UK Government announced plans to introduce from April 2020 a new digital services tax of 2% 

2018, the UK Government announced plans to introduce from April 2020 a new digital services tax of 2% on the sales generated in the UK by profitable online platforms. This new tax will be in addition to the 19% headline corporation tax rate these companies are already subject to.

A number of companies covered by the study disclosed that their effective tax rates were unusually high in the last year as they were having to pay extra tax after losing disputes with tax authorities.

Brian Peccarelli, chief operating officer, Customer Markets, Thomson Reuters says: “The huge difference in effective tax rates not only between sectors but also between companies in the same sectors highlights how critical paying the right amount of tax can be.

“Looking ahead, the Trump tax reforms and Brexit suggest that corporation tax rates could become a large area of competition between countries to attract corporates. As a result, we may see businesses more focused on the effective tax rate which in-turn may sway relocation decisions.”

Some UK companies, including banks, reported that they expect to see lower effective tax rates in the coming years as a result of the 2017 US Tax and Jobs Act. The bill reduced the headline US corporation tax rate from 35% to 21 %, therefore, reducing the amount of tax UK companies will pay on their US earnings.

UK-headquartered companies currently benefit from a headline corporation tax rate of just 19% for their UK earnings - the lowest of any G7 country. Additionally, the UK Government plans to lower the rate even further to 17% in April 2020, which would make it the lowest rate in any G20 economy.

UK banks pay highest effective tax rate – nearly double FTSE100 average