Another day, another big bank threatens to leave London. At first sight, news that Deutsche Bank could move operations out of the City in the event that Britons vote to quit the European Union may sound little different from HSBC’s decision over whether to shift its head office. But for UK taxpayers, the former would be more painful.
To see why, check out the taxes the UK government currently extracts from the banking sector. In 2013-14, banks handed over 1.6 billion pounds ($2.48 billion) of corporation tax and 2.2 billion pounds from a levy on their balance sheets, according to HM Revenue & Customs. But the lion’s share of the exchequer’s overall 21.3 billion pound take from the industry came from income taxes and national insurance. In other words, more than four-fifths of the revenue the government receives from the financial sector comes from bankers rather than banks.
Source: HM Revenue & Customs
Because of the way in which the UK balance sheet levy is calculated, HSBC and fellow emerging markets lender Standard Chartered contributed over 40 percent of the total income from that particular tax in the fiscal year that ended in April 2014. Were they to move their head offices away from London it would leave a hole in Britain’s state finances that will soon exceed 1 billion pounds. But if most of the two banks’ 50,000 or so UK-based employees stayed put, the government would still collect hefty UK corporation and income taxes.
The situation would change if the United Kingdom voted to leave the EU. Large banks are currently able to access the single market from London. If the EU no longer allowed Britain to be part of the free trade area, banks would be forced to shift operations to other member states. HMRC doesn’t disclose how much income tax and national insurance it receives from employees of foreign banks. But tens of thousands of highly paid financial workers in the City must make a significant contribution.
The two factors are linked: uncertainty over Britain’s EU membership is one reason HSBC is reviewing its location. But the main takeaway is that, for the British government, taxing bankers is much more important than squeezing the groups they work for. Insofar as an EU exit would force London-based financial workers to head elsewhere, it constitutes a bigger folly.