On 9 December 2009 the Chancellor announced a new tax regime for banks which pay bankers’ bonuses over £25,000. Whether this tax is a shrewd economic decision or a purely political move is a topic being hotly debated.

What is the tax?

The tax, known as ‘Bank Payroll Tax’ (“BPT”) applies to the total amount of bonuses to which a banker is entitled, to the extent that it exceeds £25,000. It is payable directly by the bank to HM Revenue and Customs (HMRC) and will apply whether the bonus is provided directly by the bank or through an intermediary. The tax has been set at a rate of 50%. There is an exception for contractual bonus entitlements existing at the time of the Chancellor’s announcement where the payer has no discretion as to the amount of the bonus e.g a guaranteed sign-a-bonus. Therefore, a bonus is subject to BPT where it is awarded to the employee, or where a contractual obligation to pay or provide the bonus arises on or after 9 December 2009.

The BPT applies to bonuses comprising money, money's worth, benefits and loans. It does not apply to regular salary, wages, benefits or certain approved share schemes.

Who is this tax applicable to?

The Bank Payroll Tax will be applied to "Taxable Companies" who pay “Relevant Banking Employees”. Taxable Companies comprise banks, financial businesses and holding companies in banking groups, building societies, financial businesses and holding companies in building society groups and UK branches of foreign banks.

A Relevant Banking Employee is (i) employed by a Taxable Company in "Banking Employment" (or otherwise performs "Banking Services" for a Taxable Company under arrangements involving "another party"), (ii) whose duties relate, either directly or indirectly, to activities that are "Relevant Regulated Activities", and (iii) who is either resident in the UK in 2009/10 or performs their duties wholly or partly in the UK.

"Banking Employment" means employments which wholly or mainly involve duties that relate to "Relevant Regulated Activities". "Relevant Regulated Activities" comprise acquiring deposits, dealing in investments as principal or agent, arranging deals in investments, safeguarding and administering investments on behalf of clients and regulated mortgage activities.

There has been much confusion about the application of BPT. On 18 December, HMRC released a press statement which clarified to some extent, which entities BPT would apply to. For example, HMRC states that the definition of banking group in the BPT Schedule will be amended so that no group can be treated as a banking group simply because it includes a group member with banking activity, if that activity "is a minor activity within the group as a whole". As a result, although any member of such a group which is itself a bank (under the revised definitions) will still be subject to the BPT, other group members will not be, even if they are "investment companies" or "financial trading companies" (as defined in the BPT Schedule).

Another area of confusion is whether BPT will be due on any bonuses paid to non banking staff in particular highly paid professionals (such as IT professionals, in-house lawyers or any other support staff) working for banks and other liable firms, but who are not themselves bankers, brokers, traders or fulfilling a similar role. Unfortunately, HMRC’s press release on 21 December 2009 does little more than confirm that such bonuses may or may not give rise to a BPT liability, depending on whether, on the basis of their duties, the payee is a "relevant banking employee" as defined in the BPT Schedule. Clearly not very satisfactory!

Bank Payroll Tax will not affect the income tax or national insurance liabilities of bank employees.

How long will this tax last for?

The new rules took effect immediately from 9 December 2009 and will be operative until 5 April 2010 for all discretionary bonuses that are awarded.

The draft legislation also brings arrangements for future payments within the scope of BPT where the arrangement is made during the period to 5 April 2010. The making of the arrangement will be regarded as an award of a bonus to the employee and so trigger payment of BPT.

The due date for payment of tax is 31 August 2010

Are there ways around it?

In short, if there are any loopholes in the legislation, it's best to keep quiet about them as the legislation is currently in draft and can still be tightened up by the Government.

The £25,000 limit covers the whole period in question, rather than being per payment, and applies per employee. However, if the same employee has more than one employment with two connected employers, the £25,000 is split between the two employers.

The definition of relevant earnings also includes situations where the bank enters into a future obligation to pay the relevant employee remuneration outside the relevant period where the only or main purpose of such a loan is to avoid bank payroll tax. It is clear therefore that HMRC will be closely scrutinising any payments made outside of the relevant period.

There is also an all encompassing provision in the rules which is designed to target any other plan concocted to circumvent the rules. The relevant rule will ensure that, “however the payment of a bonus (or an amount which in substance is a bonus) is structured, it will be chargeable to bank payroll tax if, but for stated aspects of that structure, it would otherwise have been so chargeable."

Officials have warned banks thinking of simply deferring bonus decisions into the new financial year that the legislation could easily be extended. Liam Byrne, the Treasury chief secretary, told MPs: "We remain open to the possibility of extending this legislation and tax if we see the kind of avoidance measures that some have been talking about." That may of course depend on the outcome of the general election.
What next?

Some Banks may instead decide to cut into dividends to retain top staff and therefore penalize investors in the process. The tax, it is predicted, will almost certainly increase the trend to higher base pay, at least in the short term, leaving institutions with less flexibility to cut remuneration if profits fall. The tax is likely to speed the flow of traders and asset managers from banks to less-regulated entities and even offshore.

It is not clear whether the tax will achieve the Government's aim to "encourage banks to consider their capital position and make appropriate risk-adjustments when settling the level of bonus payments" or whether the tax is simply pre-election posturing, the latter of which is the widely held view.

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