LONDON Britain will largely replace a levy on bank balance sheets with a surcharge on profits in a move experts said would help quell talk among lenders of moving elsewhere to lighten their regulatory burden.
Chancellor George Osborne offered further comfort to banks facing a welter of new rules since the financial crisis by asking their regulator, the Bank of England, to help keep Britain a "highly attractive" location for lenders.
The bank levy was introduced in 2011 in response to the financial crisis and applies to the global balance sheet assets of British banks as well as assets belonging to the UK operations of foreign banks.
It has raised over 8 billion pounds and is now expected to raise nearly 4 billion pounds annually.
Banks said the tax is unfair as it becomes more punitive when profitability falls. Europe's biggest bank, HSBC (HSBA.L), has said the levy will be a factor in whether it decides to keep its headquarters in Britain.
"I will, over the next six years, gradually reduce the bank levy rate, and after that make sure it no longer applies to worldwide balance sheets," Osborne told parliament as he delivered his post-election budget.
Applying the levy only to banking assets in Britain will benefit HSBC (HSBA.L), whose shares rose, and Standard Chartered (STAN.L) in particular as they have a high proportion of their assets overseas.
It also reduces the competitive disadvantage for UK banks against foreign rivals operating in Britain.
"But to maintain a fair contribution from the banks, I will introduce a new eight percent surcharge on bank profits from the first of January next year," Osborne said. The surcharge would be partly mitigated by a cut in corporation tax to 18 percent.
"By getting this balance right, it means we’ll actually raise more from the banks this parliament, but at the same time make our country a more competitive place to do business."
Bank shares initially rose after Osborne's announcement but later fell back as markets digested the news. Earlier this week, bankers urged Osborne to cap the levy rate and consider phasing it out.
The British Bankers' Association welcomed moves to reduce "damage" from the levy but said that a surcharge would mean the sector paying more tax overall and bring smaller banks under the net while dampening competition from new entrants.
Shares in smaller British banks such as Aldemore (ALD.L), Onesavings (OSBO.L), Virgin Money (VM.L) and Shawbrook (SHAW.L) tumbled on the news, down around 10 percent.
"We await to see whether today's moves are sufficient to convince those banks that the government has been listening to the concerns of the sector," said Alan Yarrow, mayor of the City of London financial district.
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Dan Neidle, a tax partner at Clifford Chance law firm, said a surcharge would help eliminate the tax disadvantage for banks to keep their head office in Britain, Neidle said.
"Overall, this reform should improve UK competitiveness. It should make it easier for banks to forecast and afford their tax costs," added Wayne Weaver, a banking tax partner at Deloitte.
The government has raised the bank levy rate repeatedly since its launch because many banks scaled back their operations after the crisis, meaning there were fewer assets to tax.
Osborne began sounding more conciliatory towards banks in a speech in June when he said he wanted Britain to be the best home for global banks and talked of a "new settlement" for the industry.
This shift was fleshed out in the finance ministry's annual "remit" for the Bank of England's Financial Policy Committee in a letter on Wednesday to BoE Governor Mark Carney.
The FPC, tasked with spotting risks to Britain's financial system, has been among the world's most hawkish regulators, forcing banks to hold far more capital than globally agreed norms.
But Osborne said he wants the City of London to remain the world's leading international financial market and for Britain to remain a highly attractive location for domiciling internationally active financial institutions.
"Therefore... the FPC should give consideration to how its actions can support the achievement of this vision," Osborne wrote to Carney.
(Additional reporting by David Milliken, William Schomberg and Kate Holton; Editing by Mark Heinrich)