Jonathan Denton, partner in law firm Mishcon de Reya’s Finance and Banking Group, examines the implications of the UK Chancellor’s proposed “bank payroll tax”.
The Chancellor Alistair Darling announced in the Pre-Budget Report that the Government would introduce a temporary "bank payroll tax" payable by banks on the value of any bonuses paid or awarded in the period from 9 December 2009 until 5 April 2010 which exceed GBP 25,000.
Bonuses in respect of which a contractual obligation to pay arose before the announcement are excluded but other than that, most payments will be caught, including deferred payments and share awards.
How much will banks have to pay?
The rate of the bank payroll tax is 50 per cent of the value of bonus payments to the extent the payment to each employee exceeds GBP 25,000. This is in addition to the employer’s national insurance on the full payment and the employee’s income tax and national insurance, all of which will be unaffected.
Banks will not be able to take the bank payroll tax into consideration when calculating profits or loss for corporation tax and income tax purposes.
Which financial institutions are potentially liable for the tax?
UK resident "banks" and UK branches of foreign banks are caught, as are their UK resident investment "subsidiaries" and financial trading subsidiaries which are resident in the UK or with operations in the UK. Similarly building societies and their investment and financial trading subsidiaries are also caught. The legislation goes further to catch corporate members of partnerships which are UK resident banks or UK branches of foreign banks. Certain companies are excluded, such as insurance companies and investment trusts.
"UK resident bank" is defined as a company whose business consists wholly or mainly of certain regulated activities, which are:-
(a) Accepting deposits; (b) Dealing in investments as principal; (c) Dealing in investments as agent; (d) Arranging deals in investments; (e) Safeguarding and administering investments; and (f) Regulated mortgage contracts.
Businesses operated as LLPs would not be regarded as a "company" for these purposes. However, if staff are employed by a corporate member of an LLP, the corporate member could be treated as a taxable company if the activities of the LLP are wholly or mainly "regulated activities".
Investment management and investment advice are not included in the list of regulated activities, but where investment managers or advisers deal in investments as agent or principal or arrange investments, it will be a question of degree in each case whether such activities comprise the majority of their business activities.
We understand that the Treasury have confirmed that the legislation is not intended to cover private equity businesses (and presumably other investment management businesses) and we hope this will be clarified in the legislation.
Which bonus awards are caught?
Cash bonuses of more than GBP 25,000 paid during the period 9 December 2009 to 5 April 2010 are caught, provided they are not paid pursuant to a binding obligation entered into prior to 9 December. However, the legislation goes further to include non-cash awards, such as shares, certain share options and benefits in kind. There are detailed rules on what is and what is not regarded to be a "binding obligation" entered into prior to 9 December 2009. In respect of non-cash awards, there are detailed rules to determine what the value of the award is deemed to be. There are substantial anti-avoidance provisions which could catch arrangements for making awards at a future date, arrangements involving temporary or permanent loans and generally any arrangements intended to circumvent the legislation.
The Mishcon View
The burden of this new tax has fallen significantly more broadly than on the financial institutions which were allegedly responsible for the credit crunch, and there are uncertainties and risks for businesses that would not normally regard themselves as "banks". The overall rate of tax for employers who are committed to make discretionary bonus awards during the taxable period is now extremely onerous.
