Taxation without regulation
we’re brand new, regulated and taxed and we’re here to show our customers that we are the bank built for them
Tax is one of the most fundamental contracts between citizen and state. Good tax is a sign of a mature economy, and the implications of badly drafted or poorly maintained tax systems are everywhere to see. Getting the tax system right in the face of emotion, ingenuity, history and culture is not trivial. Consequently tax provides both philosophers and plumbers (as well as lawyers) with a constant source of distraction.
Sympathy for good tax should be matched with an attraction towards clear and proper regulation. Regulation protects the vulnerable and the rare as much as it provides a context for times when we are badly done by. Just as good tax is not easy nor is it simple to regulate activity in constantly changing markets, and regulation often gets a worse press than it deserves.
Sometimes the tax code and regulation rely on or mirror each other. This is understandable and natural, but can have wider and sometimes unintended consequences. One example could be the new supplementary rate of corporation tax on all bar the least profitable banks and building societies – by definition a regulated group of businesses.
There’s been quite a lot of heat about this measure. For some recently floated challenger brands their share price reacted immediately, and understandably they shouted loudly. For some new entrants it will increase their cost of capital and maybe some nascent ideas won’t get off the ground at all because investor returns now look better elsewhere. That could amount to quite an impact in a sector where the need to foster competition and innovation (not the same things of course) is taken as a given by all political parties.
Competition is coming to banking. The break up of the state-funded behemoths is more banks, albeit of very similar hues to those that we have got used to. Some genuine innovation is offering more choice to customers, but it is also testing the boundaries of regulation. There are some great businesses sat outside the regulator’s purview, including those based on peer-to-peer funding, the blockchain, intermediated crowd funding, pre-paid cards and aggregation apps that pass for current accounts.
These businesses are still tiny compared to the regulated financial services sector, but when it comes to tax it now seems that the debate is not old versus new, or even big versus small. Instead, for UK businesses at least, the focus is regulated versus unregulated.
A slightly odious and exaggerated comparison makes the point. What if the philosophers taxed plumbers who are on the Gas Safe (still ‘Corgi’ to most people) Register more than those who are not? After all they are easy to identify, compliant and don’t want to lose the income from fixing your boiler. By turn you don’t want to endanger your household or your insurance by not using them. However they compete for other business with unregulated plumbers so what signal does the tax send to people training to be plumbers and to the consumer about using a regulated service?
There are other questions for the challengers. Will the (regulated) branches of foreign banks steal a march? The UK’s competitive rate of corporation tax is not as low as Ireland’s for example. In due course the reduction in the levy on banks’ balance sheets will boost the funds available to the 600lb gorillas of the High Street for IT and marketing spend. IT will sop up huge amounts but we can all get ready for even more brand rehabilitation to convince us not to look back in anger.
Perhaps it is not surprising that a subset of banks – some of them with new or challenging brand names over repainted shop windows – came off worst from the Budget. With the silverbacks coming out to play again and more competition from regulated and unregulated new entrants, these are the companies who have limited options to innovate their way out of a corner.
We’ve had a thorough debate about the supplementary rate at Atom, where we look forward to being captured by the threshold. Having had an even more involved debate 18 months ago about whether it is worth having a banking licence at all – and resolved that it certainly is despite the babble from some quarters of the fintech community - we will not be handing back our regulated status.
The reasons for this are simple, and go beyond the competitive advantages we have of a clean slate brand, a broadly drawn licence and a very efficient business model. We believe that regulation is good for customers. We’re also sure that the plumbers will help the philosophers to stop any drips that emerge from the supplementary rate. It’s now up to us to persuade customers that a brand new regulated (and taxed) UK bank is built for them.