Tyrie stated that tax is a "small but far from insignificant part of the wider competition problem", adding that the Committee "remains deeply concerned about the current inadequate level of competition in banking".
The CMA published its analysis of the banking tax surcharge on 26 February.
It concluded:
“We have examined the impact of the proposed changes on the projected tax liabilities of different banks over the next five years. We have also reviewed banks’ internal strategy documents to see whether the changes are having an impact on their incentives or abilities to compete. Some smaller banks stated in general terms that a reduction in their post-tax returns would naturally impact their investment decisions, but we found limited evidence of a specific impact on business plans or expansion strategies. Therefore, there is no strong evidence at this time that the introduction of the CTS combined with the changes to the bank levy will deter entry or expansion or will result in banks exiting. However, the full impact of the tax changes may take time to emerge.”
However Tyrie responded:
“There is widespread concern about the effects of the banking tax surcharge on competition. The CMA, after Treasury Committee pressure, produced an analysis of the surcharge in February, finding that it was unlikely to be a barrier to entry or expansion. Some disagree with this assessment, including the challenger banks themselves.
“The causes of inadequate banking competition extend well beyond tax. But the introduction of the surcharge may be adding to the already long list of problems facing challenger banks. The balance is tilted in favour of incumbents and against new entrants. It is to be hoped that the CMA comprehensively addresses the crucial barrier to entry problem. The Treasury Committee will scrutinise the CMA’s conclusions closely.”
Several major challenger banks wrote to the CMA in response to its working paper, stating:
“As we have set out in previous correspondence, the changes to the tax regime will compound the existing competitive disadvantages that smaller banks face, hampering their ability to retain earnings and fund expansion. Similarly, the reduced appeal to investors caused by the tax surcharge will inhibit smaller banks’ ability to grow…Taken as a whole, the taxation regime provided some limited counterbalancing of the larger banks’ competitive advantages, including the funding advantage derived from the implicit government guarantee. As the CMA acknowledges, this counterbalancing will be significantly reduced by the changes to the tax regime.”
