Despite fears of coming reforms big banks are still sitting pretty

Bob Diamond thought he had made his position clear when in January he told a panel of MPs that Barclays was committed to staying in Britain.

"Let me be crystal clear," the new chief executive said, "We are going to be here in the United Kingdom, and this is the place that we want to succeed."

It may be a reflection of how bankers still struggle to be taken at their word in the wake of the global financial crisis, but Diamond's statement convinced nobody. Rumours that Barclays and its bigger rival HSBC are ready to move their headquarters to Hong Kong or New York have flourished ever since.

Speculation has intensified ahead of Monday's publication of an interim report into the future of the banks by the Independent Commission on Banking (ICB). The banks fear it will recommend costly reforms.

A public admission by Diamond last week that he had "an obligation on behalf of shareholders" to look at alternative tax bases, and repeated warnings from senior City figures about the consequences of a high-profile defection, are seen as thinly veiled attempts to influence the commission's thinking.

But research by Reuters shows the commission should be in a strong position to counter such threats, since the impact of any big bank departures on the economy, government finances and the City of London's pre-eminence as a financial centre would be extremely limited.

The banks' threats to quit the UK may prove overblown, says Andrea Leadsom, a Conservative member of the Commons Treasury select committee: "I think it's unlikely - I'd say no better than evens - that any one bank will move offshore, and if they do move, what that means for tax take will depend on the bank involved. But is likely to be fairly limited."

Leadsom, a former senior executive at Barclays and one of those who grilled American-born Diamond during January's hearing, says senior bankers often tell her the government is on the verge of driving them away, but she is not impressed.

"I'm not an advocate of ever tighter regulation," she said. "What we need is clever regulation. But I don't think it's as simple as saying 'if you keep annoying us we'll just leave'. I think that's a nonsense argument."

And even if some do leave, asks Leadsom, so what? "One or two of them might change their corporate headquarters for tax purposes, but if they do go we probably won't even notice. There won't be a great outflow of workers and Canary Wharf won't turn into a ghost town."

But the wealth that the banks create undercuts complaints from the banks about government treatment.UBS's annual report for 2010 shows how tax advantages in London mean it and other banks that have made huge losses have a vested interest in staying in the UK where - unlike the US and Switzerland - they can offset losses against tax indefinitely.

This is incredibly helpful to any company. Any corporation tax paid by UBS last year was more than offset by past losses. On this scale, the offset starts to make a new levy on banks by the UK government look like small change.

At THE same time, the government is making it more attractive to be based in the UK by cutting corporation tax from 28 per cent to 26 per cent and to 23 per cent by 2014, the lowest rate in the G7. It has also moved to allay fears - a legacy of the previous government - that firms' overseas earnings may lose tax-exempt status.

Helen Miller, senior research economist at the Institute for Fiscal Studies, said: "The lower corporation tax rate in the UK and the move to exemption (on foreign income) should increase the desirability of the UK as a base."

The complexity of the global tax system is another disincentive to a big move, a fact the ICB will consider in its recommendations. Another important factor is how little the banks currently contribute directly to the exchequer in relative terms.

HSBC, which unlike rivals publishes detailed breakdowns of its tax bill including actual figures, says it paid 458 million in corporation tax in the UK last year - much more than many of its rivals but still a fraction of its 3.7 billion dividend payment. HSBC's best-paid 280 staff alone received about 288m in cash and shares for 2010.

The British Bankers' Association estimates its members contribute about 50bn a year to the UK economy, while Barclays boasted in its 2010 annual report that the banking sector employs nearly 500,000 people in Britain.

In TERMS of taxes alone, commercial secretary to the Treasury and former banker, James Sassoon, told members of the House of Lords in February that large banking groups were expected to contribute around 20bn in tax for the 2010-11 tax year.

Crucially, though, that figure includes indirect contributions such as income tax paid by bank employees. Even if a bank leaves, it is unlikely to take all its staff with it. HSBC employs more people in the UK than it does in any other single market - almost as many as in Hong Kong and the US combined. A lot of those jobs are likely to stay no matter where the bank is based.

The big winners are shareholders. About 40 per cent of the 3.7bn in dividends that the bank is paying will go to UK pension funds and shareholders. Combined, the top eight shareholders alone will make more in the dividend pay-out than the UK taxman gets in corporation tax. Those dividends will keep rolling in wherever HSBC is based.

It's a similar story with other banks.Barclays annual report shows it had a worldwide tax charge of 1.5bn, which equates to less than 13 per cent of its 12bn in staff costs, most of which are salaries and pension contributions.

In FEBRUARY, in response to questions from the Treasury select committee, the bank revealed that it paid 113m in corporation tax to the UK in 2009 - 1 per cent of its global pre-tax profit that year, and less than a quarter of the 504m in remuneration and deferred incentives handed out to Barclays' top bankers in 2010.

And while much is made of the fact that Barclays' investment bank is now bigger than its UK retail operation, Britain still accounted for 40 per cent of its total income in 2010, against 25 per cent from the Americas.

For all its readiness to import star bankers and investors, Barclays remains about as British as strawberries and cream at Wimbledon on a summer's day. Almost half of its loans are made in Britain and about 60,000 of its 147,500 staff are in the UK.

Last year, 80 per cent of the 2,000 jobs created by the bank were in the UK - hardly a sign of an impending exodus.

One of the reasons for that may be the lure of London itself. The latest edition of the Z/Yen Global Financial Centres Index published last month showed it remained top choice among financial services professionals.

London is an "extraordinarily attractive" place for bankers to live, argues Leadsom, even if high-earners have been hit with more income tax.