The government’s plan to cut a surcharge on bank profits will disadvantage digital challenger banks, which face a steep rise in corporation tax.
With corporation tax rising to 25% in 2023, the government is giving something back to the big banks by cutting their profit surcharge from 8% to 3% for profits over £25m.
But because challenger fintech banks are high investment and currently loss-making or making relatively low profits, they will miss out on the benefits.
Writing for CityAM, TechUK’s open finance and payments working group chair Louise Beaumont said that John Glen, economic secretary to the Treasury, outlined the logic behind the move in September as “to be competitive, we have to have competitive tax rates”.
“It seems that [chancellor] Sunak and Glen may have neglected to extend this competitiveness to digital banks – an important part of the fintech sector,” said Beaumont.
Digital banks stand to pay 6% more corporation tax and miss out on the surcharge reduction because it is only levied on profits over £25m, she said. “High-growth, high-investment companies usually operate losses, hence they are missing out. This means that digital banks would seem to be facing a tax rise of 6% compared to the 1% facing the established banks.”
Beaumont questioned how this fits with “government rhetoric” on the importance of innovation, competition, and the continuing development of the UK’s fintech industry.
“This progress is at risk from ill-considered tax changes trailed by the Treasury,” she said.
The government has championed fintech as an industry of the future in the UK and London is already one of the favoured destinations for entrepreneurs to launch digital challenger banks, said Beaumont.
“When he was made city minister in 2018, Glen acknowledged that the UK was the ‘best place in the world’ for fintech. He said his role was ‘to ensure it remains as such’. Giving legacy banks what looks like a 5% tax advantage over their challenger rivals is an idiosyncratic way of achieving this.”
She said the UK needs a tax policy that fosters the fintech sector, adding: “If they do not, the UK will aimlessly wander into a situation where a world-leading industry is stifled just at as it begins to really scale.”
Beaumont criticised the big banks for using their influence to secure unfair advantages from the government. “Rather than open, competitive and connected markets, we will instead see a gradual slide back to the monopolistic system present before the implementation of open banking in 2016,” she wrote.
She said £13.5bn was invested into UK tech industries in the first half of 2021 with 20 unicorns created, 11 of which are tech startups, attracting £4.2bn. “Slapping a tax increase of 6% onto such firms could well deter investment and reduce opportunities for rapid scaleups,” she added.
Read more about UK fintech Fintech investments have bounced back in the first half of this year after a Covid-19-hit 2020. The UK government faces a ‘now or never’ moment if it wants financial technology to play a central role in the economy for years to come. Revolut has become the most valuable financial technology firm in the UK after its latest round of investment, with plans for a ‘superapp’.