Cost of EU's financial transaction tax would be passed on to UK pension savers, says NAPF

Out-Law News | 01 May 2014 | 3:24 pm | 2 min. read

The cost of a future European financial transaction tax (FTT) would be passed on to "millions" of UK-based private savers and pension scheme members, even if the UK itself was not participating in the tax, an industry body has said.

Yesterday, the Court of Justice of the European Union (CJEU) rejected a challenge brought by the UK against the proposed introduction of an FTT between 11 EU member states. The UK has claimed that the plans as currently proposed do not respect the rights of countries that are not participating as they will apply to UK firms trading with businesses based in a participating state.

Industry body the National Association of Pension Funds (NAPF) said that the financial institutions and banks that manage the investments of UK-based savers and pension scheme members would "undoubtedly" have to pass the cost of compliance onto their customers.

"The FTT is not the best way to reduce excessive risks or tackle bad behaviour in the markets," said James Walsh, the NAPF's head of policy for EU and international issues.

"The government is right to challenge the tax's legality as it is highly likely that it would affect UK pension schemes and their members. The CJEU is not saying the UK's challenge is wrong, only that it is premature because the details of the tax are not yet clear. By challenging the FTT's legality now, the UK government has protected its right to make a more detailed challenge later, once the full proposal is available," he said.

The proposed tax would apply where financial instruments such as shares, bonds, securities and derivatives are traded between banks where at least one party is established in a participating member state regardless of where the transaction itself takes place (the 'residence' principle); or where that financial instrument is issued in a participating member state (the 'issuance' principle). Although it would not directly affect the value of savings, it will have a substantial impact on the value of the equity and debt holdings that underpin them. It is planned that trading shares and bonds would be taxed at 0.1%, while derivatives would be taxed at 0.01%.

Rejecting the UK's challenge to a decision by the Commission to allow 11 EU member states to proceed with an FTT under the 'enhanced cooperation' procedure, the CJEU said that the UK's arguments were "directed at elements of a potential FTT" rather than the procedural questions. Enhanced cooperation allows a minimum of nine member states to take forward Commission proposals that lack broader support from member states. Austria, Belgium, Estonia, France, Germany, Greece, Italy, Portugal, Slovakia, Slovenia and Spain currently plan to take forward their own plans for an FTT.

The UK Treasury has indicated that it will challenge the FTT at a later stage if the final tax was "not in our national interest and undermines the integrity of the single market". Pensions expert Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, said that its position was "heartening" given the likely effect of the tax on UK pensions and savings.

"The government has been pulling out the stops to encourage pension saving; through auto-enrolment, and proposing new flexibility in how pensions can be taken from April 2015," he said. "It would be a real shame if a dampener came along in the shape of an additional tax charge for pension savings."

Consultancy London Economics published a report considering the impact of the proposed tax on household savings in four EU member states that planned to participate and two that did not earlier this year. Although the likely impact of the proposed tax was likely to be much higher in participating member states with sizeable capital markets, its report concluded that UK savings and pensions could lose as much as €4.4 billion in value as a result of the "extraterritorial reach" of the proposals.