More to HSBC's domicile talk than risk of UK leaving Europe

Businesses, like individuals, like to cloak their motives in high-sounding ideals. So when HSBC revealed last week it was considering whether to move its domicile from the UK to another jurisdiction, the bank was at pains to stress it was not doing so simply to find somewhere with looser regulation or lower personal taxes.

The real concern was apparently Europe and the possibility Britain might leave the EU, eroding its attractiveness as a financial hub. Douglas Flint, HSBC's chairman, sighed about the overwhelming economic importance of this question, given the UK's dependence on the EU for its trade.

Europe may, of course, play some part in HSBC's thinking. But it is not why investors have been urging the board to put the domicile question back on the table. Their beef has little to do with access to the single market or indeed the climate of "banker bashing" that senior executives claim to find so prevalent in Britain.

It has much more to do with the so-called bank levy, a tax on bank balance sheets that was introduced in 2010 to oblige the UK's largest financial institutions to contribute towards the risks they had so visibly generated during the financial crisis.

A rate of 0.21 per cent on balance sheet liabilities may not sound like an undue burden. But it bites deep into bank finances - especially at a time of low returns.

The amount HSBC stumps up - $1.1bn last year - dwarfs the taxes it actually pays on its UK profits. Worse still for the bank, the levy is increasing at a pace that far outstrips the growth in its British arm. Under changes announced in last month's Budget, it could cost $1.8bn a year by 2017.

One reason HSBC pays so much is because of the way the charge is set. The levy falls not just on the bank's British balance sheet but its worldwide liabilities, less certain deductions.

This makes HSBC, with its large international business, the biggest UK payer - even though it is the only one to have come through the crisis without requiring an equity injection from any government, British or otherwise. It also gives the bank an incentive to relocate its headquarters. International banks pay the levy only on their UK balance sheet footings. By shifting its domicile HSBC could cut the tax almost in half, potentially releasing billions of dollars.

HSBC is not alone in finding the charge irksome. Last month, two shareholders of Standard Chartered, another international bank headquartered in the UK, pressed it to consider moving on similar grounds.

What grates with investors is not just the absolute level of the tax, but its extraordinary volatility. George Osborne may have sought to give the UK the most competitive corporate tax regime in the G20 - one with low and predictable rates. But in two sectors the chancellor has succumbed to the urge to tinker.

In 2011 he opportunistically increased production taxes for North Sea operators, figuring that at a time of soaring oil prices they could safely be milked for extra cash. He has approached the levy in a similar spirit. Noting the unpopularity of bankers, and gambling that no other jurisdiction would want to take on banks with significant global liabilities in the wake of the crisis, he has more than quadrupled the rate in five years.

Mr Osborne has already been caught out on the oil tax rise. Following the collapse in the oil price and North Sea investment, he reversed most of the changes in the latest Budget in a belated attempt to rebuild bridges with the industry.

Now, it looks as if HSBC is trying to force a similar change of direction on the levy. Of course, it is far from clear that it makes sense for HSBC to move house, even if the Hong Kong authorities are keen to welcome the bank home. The costs would be considerable. Decamping from the UK to Hong Kong would mean losing the benefit of any credible sovereign guarantee and potentially assuming greater political risk. Were this to push up the bank's cost of capital, the whole exercise might be in vain.

Nonetheless, a warning shot has been fired. Raising the levy further might not trigger an exodus. But, as with the oil industry, it would drag on the willingness of financial institutions to invest and do business in the UK, ultimately diminishing the tax take from the sector in future. It is something for the next chancellor to ponder before deciding what rate of levy to set.

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