In Anglo-Continental Guano Works v Bell (Surveyor of Taxes), Mr Justice Cave summed up thus: “It seems to me... that the gains of the trade are quite independent of the question of how the capital money is found… [One] cannot take into  BIS central bankers’ speeches  5  consideration the fact that the firm or trader has to borrow some portion of the money which is employed in the business... If you did that it would land you in very extraordinary results”.12 Indeed, it might land you in the guano. But banking was about to buck this trend. In Farmer (Surveyor of Taxes) v Scottish North American Trust, Limited, Lord Atkinson referring to the Anglo-Continental case concluded: “It does not appear to me that the reasoning on which this decision is based can apply to a bank whose business is the borrowing and lending of money”.13 From early in the 20th century, debt interest became a legitimate deductible from bank profits. Where banks led, non-financial firms followed. This debt bias has persisted in the century since.14 The scale of tax-induced debt bias is generally greater the higher the rate of corporation tax and the lower the rate of personal taxation of equity. The IMF (2009) has recently estimated the scale of debt bias in a selection of developed countries. For low or tax-exempt investors, such as pension funds and non-residents, debt is typically between 30–40% cheaper than (new or retained) equity.15 For high-tax investors, the biases are smaller but still significant.
This is the same methodology as Oxera (2011) with a downward adjustment for the risk free rate to the nominal yield on 1-year UK gilts and considers that support can be realised at any time during the year. The figure for global banks is an estimate based on the UK figures. (b) Calculated by comparing the difference in funding costs calculated as an annual average for individual banks, based on the difference in the average funding cost of benchmark financial institutions rated at the support rating and the average funding cost for financial institutions rated at the standalone rating. This difference is then multiplied by the rating-sensitive liabilities of the bank or building society. Data availability for non-UK banks is less granular. BIS central bankers’ speeches  25