British financial services firms face huge bills to comply with US tax changes

BRITAIN'S financial services industry faces a bill running into hundreds of millions of pounds to comply with new US tax rules that could force smaller UK firms to leave America.

Big banks may end up paying 100 million each to comply with the Foreign Account Tax Compliance Act (FATCA), which US President Barack Obama introduced to ensure Americans are paying tax even if their money is held abroad.

Industry insiders have described the legislation - which comes into force in 2013 - as a "nightmare" and have suggested that some smaller operators may pull out of the US rather than pay a high price to comply with the act.

Under the new rules, banks will have to release information about American account holders to the US authorities.

Going through the huge amounts of data held about clients and their transactions - and proving to US regulators that the work has been done - is expected to be very costly.

The FATCA will not only affect British banks operating in the US but also asset managers, insurance companies and other financial services firms.

If a company does not comply with the act then the US Treasury and Internal Revenue Service (IRS) can slap a 30 per cent tax on all of its assets.

Even if individual companies do not operate in the US, they could still be fined if one of their suppliers does not comply with the act.

Further guidance is expected to be released by the IRS over the summer as negotiations continue on its implementation. Banks could need up to 18 months to put systems in place to comply with the act.

Tom Aston, a tax partner at "big four" accountancy firm KPMG, said: "Banks have gone through the process of anger and denial and now realise they have to deal with FATCA.

"Pulling out of America could be a knee-jerk reaction from smaller players, and I know a lot of them are looking closely at what FATCA will mean for them.

"This is a big burden for the banks on top of all the other new regulations and requirements being imposed on them after the financial crisis."

Aston added: "Some of the costs of compliance could be passed on to clients in the form of higher fees, but some companies may also withdraw services if they think the cost of compliance outweighs any profits they could make."

Aston warned that if the US receives a large increase in tax revenue following the enforcement of the FATCA then other jurisdictions, including the EU, may follow suit.

Others in the industry believe the act falls foul of data protection rules, with the UK ambassador writing to the IRS and US Treasury to outline objections to UK firms being required to pass on data.

A spokeswoman for Scottish Financial Enterprise said that members had been talking to the trade body about the FATCA. She added: "Companies are assessing how the legislation will impact on their business. This is part and parcel of operating internationally, as organisations regularly need to appraise their business in light of legislative changes."