BRITAIN’S biggest banks fear that the Chancellor is preparing to levy a £1 billion “windfall” tax in his Pre-Budget Report next week, The Times has learnt.

The banks are locked in last-ditch negotiations with the Treasury and Revenue & Customs, in an attempt to dissuade Gordon Brown from introducing the tax on Monday.

The talks, which have been running for two years, centre on the amount of tax relief that should be given to banks on their bad debt provisions under new international accounting rules.

Historically, banks have been able to claim tax relief on specific, but not general, bad debt provisions. Under the new accounting rules, however, all provisions are deemed to be specific, leading the banks to believe that tax relief would be available on all of their bad debt charges.

The Revenue disputes the banks’ claim to the extra relief, and is thought to be considering scrapping the tax break altogether in a move that would boost the government’s coffers by about £1 billion.

One major bank told The Times that it expected a statement on the tax to be made in Monday’s Pre-Budget Report. However, another said that no agreement had yet been reached.

One of Britain’s biggest banks, which asked not to be named, is pressing the Chancellor to spread the tax relief over ten years, as a compromise solution.

Another said: “We are getting increasingly frustrated about the lack of clarity on the issue. Given the fact that it has been going on for two years, you would have thought that it would have been sorted out by now.”

The Revenue said yesterday: “We are monitoring the effect of International Accounting Standards on corporation tax.”

News of the dispute brought accusations that the Treasury is attempting to introduce a “windfall tax” on banks by stealth.

Lord Oakeshott of Seagrove Bay, the Liberal Democrats’ Treasury spokesman, said: “The Chancellor must not smuggle in a stealth tax on the banks under a cloak of international accounting standards.

“If he wants to impose a windfall tax on the banks, then he should come clean and explain what he is doing and why.”

The banks’ substantial profits have long been viewed as a possible source of extra tax by the Government. However, the Treasury has stopped short of imposing a windfall tax on profits and instead has introduced tougher regulation and price controls on bank services to small businesses.

Britain’s biggest banks made more than £30 billion of profit last year. Despite rising bad debts, many are on course for record profits again this year.

The head of Britain’s banks have faced hours of gruelling cross-examination in front of the Commons Treasury Select Committee over profits, consumer indebtedness and pay.

Despite attempts by Don Cruickshank, in his 2000 report into competitiveness among banks, to cut profitability, Britain’s banking earnings go from strength to strength.

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