By Mark Kleinman, City Editor
The UK Government's bank levy undermines both its own desire for a stable tax regime and the City's status as a leading financial centre, the industry's main lobbying group has warned George Osborne.
In its submission to the Treasury ahead of next month's Budget, the British Bankers' Association (BBA) has launched its strongest broadside to date against the tax, which was introduced by the Chancellor after the 2010 General Election.
In a copy of the document, which has been leaked to Sky News, the BBA said that regulatory change introduced since the 2008 banking crisis had already reduced the riskiness of banks' activities.
"When the bank levy was introduced, the stated aims were to 'encourage banks to move to less risky funding profiles', and to ensure banks provide 'a fair contribution in respect of the potential risks they pose to the UK system and the wider economy'," it said.
"Many regulatory developments, augmented by banks' own initiatives, have altered the structure and culture of banks by reducing risk-taking in the sector, reducing the likelihood of bank failure and by creating firebreaks through ring-fencing.
"However, the bank levy rate has been increased eight times since (it) was first announced at Budget 2010, and many of those increases have been implemented with minimal advance notice."
The BBA's decision to attack the Treasury over the levy comes at a delicate time for relations between the industry and the Treasury, with pressure still being applied to the Chancellor by Labour to impose a new tax on bank bonuses.
In last year's autumn statement, Mr Osborne pledged to broaden the base of the bank levy and said: "I can also announce, from January 1 next year, the rate of the bank levy will rise to 0.156% and its base will be broadened in ways we have consulted on.
"The levy will raise £2.7bn in 2014-15 and £2.9bn each year from 2015-16. The country stood behind the banks in the crisis and now it is right that they support the country in recovery."
HSBC, which reported annual results on Monday, said that it had to pay $916m (£551m) as its contribution to the bank levy last year, the highest level of any of the eligible UK lenders despite being regarded as the least risky bank in terms of its funding profile.
The BBA said that the frequency of the levy rate changes had "not resulted in a stable tax environment for the banking industry and is inconsistent with the Government's desire for the UK to have a competitive, stable and predictable tax regime for business which encourages inward investment and supports the UK's place as the world's leading international financial centre", it said in its submission.
It argued that Mr Osborne should reduce the emphasis placed on a specific collection target in order to better inform public debate on the issue.
The levy "adversely affects the competitive landscape and the UK's position as a financial centre," it said.
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