Thank you Mark [Mark Boleat, Chairman of the Policy and Resources Committee, City of London Corporation] – it’s good to see so many of you here today.
Thank you also to the teams at the City of London Corporation and at PwC for producing this useful report that is being launched today.
The report is a timely reminder of the valuable contribution that the financial sector makes to our economy and how important it is that we continue to build on its success.
Importance of sector
The UK’s financial services industry plays a vital role in the UK, European and global economies, benefitting customers across the globe.
Last year, we exported £63.7 billion in financial services, insurance and pensions.
We are a global hub for renminbi, rupee, Islamic finance, green finance and FinTech business.
The UK is known for its strong and independent regulators, its highly skilled workforce in financial services and the associated professions, as well its natural advantages in language and time zone.
And while I am speaking at the City of London Corporation, it is important to remember that it is not just London that benefits.
The UK financial services sector employs more than 1.1 million people – two thirds of these are based outside London.
For example, in the North East, the financial sector adds around £2 billion to the local economy every year and directly employs 26,000 people in the region.
In Scotland, 85,000 jobs are supported by sector.
In the North West, this figure is 98,000.
We also see major hubs in Belfast, Leeds, Birmingham, Bristol and Cardiff.
And today’s report estimates a total tax contribution from the sector of £71.4 billion, with significant amounts paid in corporate, employment, and indirect taxes.
Government’s approach to taxation
I now want to talk about this government’s approach to taxation.
We have made important changes to improve and simplify the tax system since we came to power in 2010.
At that time we were faced with the aftermath of the financial crisis.
Unemployment had risen, many businesses had gone bankrupt and one in every 4 pounds spent by the government was borrowed.
Our plan was to fix the public finances and back business to stimulate a private sector-led recovery, with the aim of making the UK a more attractive place to invest and grow a business.
Our action has helped to create many more businesses and helped two million more people find work.
Reforms to make our tax system more efficient and competitive have played a key role in these successes.
Our business tax roadmap, to which we renewed our commitment at Autumn Statement, set out our key principles:
Taxes should be competitive and fair, but they must be paid.
The playing field should be level – between small and large businesses, and between different corporate structures.
And the system should encourage entrepreneurship but never reward aggressive tax planning.
The roadmap sets out a long-term plan that is competitive, sustainable and provides certainty to businesses.
As part of the roadmap, the main rate of corporation tax will be cut to 17% in 2020, benefiting over one million businesses.
This has already been cut from 28% in 2010 to 20% today – and the further cuts will ensure the UK has the lowest rate in the G20.
We will also continue to make sure that our tax system is fair.
That means a number of things.
It means making sure our tax base is sustainable – and that’s why you’ll have seen our changes on aligning employer National Insurance thresholds, or the rise in Insurance Premium Tax in the Autumn Statement.
It also means making sure our tax system reflects the changing ways we work – which is why we’re going to consider how to ensure the taxation of different ways of working is fair and sustainable.
While this report covers the whole financial services sector, I would like to turn specifically to our bank tax regime.
That’s because banks play a unique role in the economy, and as a result can pose unique risks.
To reflect these risks we have been clear that banks should make a fair tax contribution.
And banks do make an important contribution.
HMRC statistics show that total Pay-as-you-earn and corporate tax receipts from the banking sector stood at £24.4 billion in 2015 to 16, up from £22.9 billion in the previous year.
At the 2015 Summer Budget we set out a sustainable long-term plan for bank taxation.
This included an 8% corporation tax surcharge on banking profit, alongside a phased reduction in the rate of the bank levy.
We also announced that the levy would apply to UK balance sheet liabilities only from 2021.
As the banking sector continued to recover from the financial crisis, the time was right to shift to a less distortive balance of taxation less reliant on balance sheets and more dependent on profit.
By 2021, banking firms will pay 25% tax on profit – the lowest among G7 nations – alongside a 0.1% levy on UK balance sheets.
We believe that this balances the need to raise revenue with continuing to offer a competitive tax environment for financial services, all the while providing certainty to the sector.
Having said that, we will of course continue to consider the balance between revenue and competitiveness, taking into account the implications of the UK leaving the EU.
Autumn Statement 2016
At the Autumn Statement we looked to provide further certainty to the sector and to demonstrate the government’s commitment to UK competitiveness.
For example, we unveiled a competitive new tax and regulatory regime for Insurance Linked Securities business.
This is a growing area which gives protection buyers new options to transfer risk to the capital markets.
The regime is designed to allow the UK and the specialist London insurance market to compete in this innovative area.
And it will help maintain London’s position and reputation as a world-leading insurance hub.
Furthermore, as part of the reform of the bank levy in 2021, we confirmed that capital issued by UK banks to fund overseas subsidiaries will be exempt from the levy.
We also confirmed that liabilities relating to the funding of UK banks’ overseas branches will be exempt.
This means that the bank levy will be applied on a purely territorial basis, regardless of whether banks choose to operate overseas through subsidiaries or through branches.
To provide further certainty, we confirmed that this would be legislated in Finance Bill 17-18.
Meanwhile, on corporate interest expense, we announced that banking and insurance groups will be subject to the rules in the same way as groups in other sectors.
You will have also noticed that the Chancellor announced that the UK will be moving to a single fiscal event from autumn 2017.
This change is a long-overdue reform to our tax-policy making process.
Not only does it bring the UK into line with best practice – as recommended by the IMF, IFS, and Institute for government and many others.
But it also provides certainty to businesses and allows for greater Parliamentary scrutiny of Budget measures ahead of their implementation.
And it is in the context of the coming period of uncertainty than such a move has been welcomed.
For as I’m sure all of you will appreciate, the negotiations that we will enter into next year with our European partners will be complex and multifaceted.
And it would not be wise nor helpful of me to prejudge the conclusions at this stage.
But let me clear that the government is committed to delivering the best possible deal for Britain’s businesses and workers – including our vitally important financial services sector.
We are confident that the best economic outcome for our 27 European neighbours will be the best economic outcome for us as well: free and open trade between our countries.
Indeed, as the Prime Minister has made clear, the UK is – and will continue to be – a “passionate, enthusiastic and convinced” supporter of free trade in the world after we leave the EU.
And, while it true that there are risks ahead, we will build a new future from a position of hard-won strength.
We’re building an economy that is ‘match fit’, outward-facing, internationally focused, and ready to embrace new opportunities.
We are aware of the new environment that financial services firms are facing and we are committed to making sure our tax regime remains robust and highly competitive.
The message is a simple one: the UK remains firmly open for business.
As I said at the start, this report serves as an important reminder of the contribution that the financial sector makes to our economy.
And I look forward to hearing your views and working with you to continue to build on the success of the financial services sector in the UK.