Tax Update: Bank Payroll Tax

1. Background

In his Pre-Budget Report on 9 December 2009, the Chancellor of the Exchequer, Alistair Darling, announced a new tax on bank bonuses. This was widely seen as a populist measure by which banks, blamed for the financial crisis, would be obliged to provide some degree of reparation. It should be noted though that the rules do not just apply to banks but can in some cases apply to other financial companies.

HM Revenue & Customs ("HMRC") issued a technical note, draft legislation and guidance notes on 9 December 2009. On 18 December, HMRC issued a special announcement setting out changes to their 9 December rules in response to concerns from the financial services sector that the rules as originally drafted were far wider than the name of the tax and its stated purpose had suggested. HMRC have also issued responses to some particular questions asked of them. 

At present we have only draft legislation, which, as can be seen from the 18 December announcement, is subject to change. It is proposed that the legislation will be enacted in Finance Act 2010.

This note provides a summary of the new bank payroll tax. 

2. What do I need to do?

The onus is on each "taxable company" to assess whether it is liable for the new bank payroll tax. We would be pleased to discuss with you:

• whether you are potentially caught by the rules;
• how to deal with the tax in the context of discussions with key employees; and
• whether there may be merit in you making specific representations to HMRC.

3. What is the tax?

Where a "taxable company" pays or awards "relevant remuneration" to a "relevant banking employee" between 9 December 2009 and 5 April 2010 that exceeds £25,000, a tax of 50% will arise on that excess, payable by the "taxable company" by 31 August 2010. The tax will be non-deductible for corporation tax purposes.  It is important to understand that this is a tax on companies not on the individual banking employees (althought the Government hopes that it will be passed on to the recipients of bonuses in the form of reduced bonus payments).

Therefore certain tests need to be met before the tax can apply:

• the relevant company must be a "taxable company";
• the remuneration must be "relevant remuneration" awarded or paid between 9 December 2009 and 5 April 2010 and must exceed £25,000; and
• the employee must be a "relevant banking employee".

The remainder of this note explains these criteria.

4. What is a "taxable company"?

The definition is complex and what follows is only a summary. A "taxable company" means:

• an FSA-authorised UK-resident company that is a deposit-taker;
• an FSA-authorised UK-resident company which is a full scope BIPRU 730k investment firm  whose activities consist wholly or mainly of relevant regulated activities;
• an FSA-authorised non-UK resident company carrying on a trade in the UK through a PE that is a deposit-taker;
• an FSA-authorised non-UK resident company carrying on a trade in the UK through a PE which is a full scope BIPRU 730k investment firm (or which would be such a firm but for its head office being outside the UK) whose activities consist wholly or mainly of relevant regulated activities;
• a member of a banking group that is
  • a UK resident investment company or financial trading company; or
  • a relevant foreign financial trading company;
• a building society; or
• a member of the same group as a building society and which is a UK resident investment company or financial trading company.

Special rules apply to companies that are partners or members of a partnership.

HMRC's phraseology appears to combine the terms: "full scope BIPRU investment firm" and "BIPRU 730k firm". A BIPRU 730k firm may wish to check whether it is a "full scope" firm within HMRC's meaning. In general terms, a BIPRU 730k firm is a firm (other than a bank, building society, insurer or operator of a UCITS scheme) which has permission to deal in investments as principal, i.e. on its own account. In addition any operator of a multilateral trading facility (other than a recognised investment exchange) will also be a BIPRU 730k firm. 

It is interesting that the full scope BIPRU 730k investment firm requirement does not apply to the banking group definition, meaning that some companies that outside a group would not be subject to the tax could be subject to it if they are members of a banking group. It is not yet clear whether this anomaly is intended. 

Helpfully, HMRC have said that they will, through changes to the current draft legislation, remove prime brokers who are full scope BIPRU 730k firms from the scope of the tax.  They have also said that they will exclude non-banking financial services groups where they are characterised as banking groups simply because the group includes a company with banking activity where that is a minor activity within the group as a whole (in such cases the bank would be the only group company within the scope of the tax).  This is a welcome restriction to the scope of the tax.  It is expected therefore that asset managers and stockbrokers will not generally be subject to the tax.

Furthermore, there are various types of companies that are excluded from the first 4 bullet points in the definitions of "company". Amongst the exceptions are:

• insurance companies;
• investment trusts and OEICs;
• a company whose activities consist wholly or mainly in acting as operator of a collective investment scheme; and
• a company that does not carry on any relevant regulated activities otherwise than as a manager of a pension scheme

It should be noted that these exclusions do not apply to the remaining bullet points, so that there is a potential anomaly in that some such companies that outside a group would be excluded companies, when inside a banking group might still be caught by the tax. This point may be clarified as the consultation process on the draft legislation continues.

5. What are "relevant regulated activities"?

A relevant regulated activity is any of the following FSA-regulated activities:

• accepting deposits;
• dealing in investments as principal;
• dealing in investments as agent;
• arranging deals in investments;
• safeguarding and administering investments; or
• regulated mortgage contracts.

6. What is "relevant remuneration"?

"Relevant remuneration" will include any discretionary payment that constitutes earnings or a benefit provided by reason of employment (regardless of whether the employee is subject to UK income tax), although, amongst other things, it will not include any fixed regular salary, any contractual obligation arising before 9 December 2009 (including certain bonus pools settled before that date even though unallocated at that date), or certain share awards under approved share schemes.

7. What is a "relevant banking employee"?

A relevant banking employee is an employee who is UK tax resident in the 2009/10 tax year or whose duties are at any time in that tax year performed wholly or partly in the UK, and whose duties are (directly or indirectly) wholly or mainly concerned with relevant regulated activities or money-lending.  HMRC have confirmed that this should not generally include non-proprietary activities such as operating a collective investment scheme or dealing and arranging as agent as part of the discretionary management of assets for clients.

The use of "indirectly" means that it is not enough to ask simply whether the employee is concerned with relevant regulated activities.  HMRC have given an example of arranging a regulated mortgage contract which, although not itself a relevant regulated activity, is in their view indirectly concerned with one.

HMRC have said that where the duties of banking employment are performed by a non-UK resident employee who visited the UK for 60 days or less in the 2009/10 tax year, that employee will not be a relevant banking employee.

Special rules apply where there are intermediaries involved in the employment arrangements, for example certain secondment arrangements or personal service company arrangements. 

8. Anti-avoidance

There are various anti-avoidance rules. These include rules relating to making arrangements to pay a bonus after 5 April 2010, rules preventing loans (including loans in conjunction with employee benefit trust structures and similar arrangements) in order to avoid there being earnings and thereby avoid there being "relevant remuneration". There is, in addition, a general anti-avoidance rule in respect of bank payroll tax.

9. Is it a one-off or will it be repeated next year?

The stated intention of the tax is to encourage change in the remuneration packages given within the banking industry so that excessive risk-taking is not rewarded and so as to encourage banks to consider their capital position. There was no doubt an unstated political aim behind the tax too.

The Government hopes that corporate governance and regulatory reforms will in the longer term change remuneration models. However, the Government has not ruled out extending the bank payroll tax to apply in future years, specifically if the Financial Services Bill (which deals with remuneration practices) is not enacted by 5 April 2010. 

For further information, please contact Nick Noble, Derek Hill or Andrew Prowse.