Bank Payroll Tax

 

Following the Chancellor’s announcement on ‘Bankers Bonus’ Tax (Bank Payroll Tax (BPT)) in the Pre-Budget Report (9 December 2009), this Technical Note sets out to give further details of the range and scope of the new tax.

It should be noted that the legislation supporting BPT exists in draft form only at the moment, and is potentially liable to change between now and the drafting of the Finance Act in April – itself then subject to further revision prior to receiving Royal Assent in around June or July 2010.  Particularly it should be noted that HMRC is being pressed to provide greater clarity as to which employers are subject to the new tax, as a number of subsidiary companies of banking groups would appear on face value to be caught by the new tax, whereas if those same companies were independent (as will be the case for many of their competitors) the tax would not apply.  We will therefore look to add updates to the foot of this Technical Note as any further significant developments become known.

 

Overview

 

The new tax applies broadly to banks and building societies that award certain employees bonuses in excess of £25,000 in the period from 9 December to the end of the current tax year.

Within the conceptual overview there are four key elements, and these are explored in greater detail below. 

 

(i) Banks and Building Societies

For the purposes of BPT, it is necessary to consider whether the employing company constitutes a “taxable company”, defined as:

* A bank

* A UK resident investment company or UK resident financial trading company within a banking group

* A building society

* A UK resident investment company or UK resident financial trading company within a building society group

* A UK branch of a foreign bank or the UK branch of a foreign financial trading company in a banking group

 

The important point to note here, as with much of BPT, is that the focus is on the nature of the employing company, and therefore ultimate responsibility for deciding whether or not the company is subject to BPT falls with the employer, not the employee.

Having considered the nature of the employing company, it is then necessary to consider the nature of the duties undertaken by the employee:

 

(ii) Certain Employees

Assuming the company to be a “taxable company”, an individual employee’s bonus will be considered for the purposes of BPT if that employee undertakes “banking employment”, and:

*Is resident in the UK during the 2009/2010 tax year; or

*Performs duties of the “banking employment” at any time in that year wholly or partly in the UK

 

Banking employment is one in which the duties consist wholly or mainly, directly or indirectly, of “relevant regulated activities”.  The relevant regulated activities are ones that are regulated by the Financial Services and Markets Act 2000, and which in turn are defined as:

* Accepting deposits (i.e. providing current accounts and deposit accounts to retail customers)

* Dealing in investment as Principal (i.e. trading in derivatives, bonds commodities etc. on their own account)

* Dealing in investments as Agent (i.e. trading in the above types of investment on behalf of clients)

* Safeguarding and administering investments on behalf of clients; and

* Regulated mortgage contracts (i.e. carrying out retail mortgage lending)

 

In an attempt to counter avoidance (see below) the rules will also extend to anyone who undertakes any of the above activities on behalf of a taxable company via a third party rather than under contract directly with the taxable company; and the rules will further extend to instances where the employee is employed by a partnership formed between the taxable company and a third party, rather than the taxable company itself, and carries out any of the above activities on behalf of the partnership.

 

(iii) In Excess of £25,000

BPT applies to bonuses comprising money, money’s worth (e.g. goods and services), benefits and loans.  Where the bonus includes either money’s worth or a benefit, the amount of remuneration for the purposes of bank payroll tax is the higher of market value or the cost of providing it.

BPT specifically does not apply to regular salary, wages and benefits.

Again, in an attempt to counter avoidance, the £25,000 threshold applies to the aggregate of all bonuses awarded to the employee from associated companies within the same group (companies are deemed to be associated if one is controlled by the other, or if one of them is under the control of a third party which itself controls or is under the control of the other).  Similarly all awards to the employee during the period will be aggregated in an obvious move to stop large bonuses (potentially up to £3m) being ‘thin-sliced’ into amounts of just less than £25,000 and awarded on successive days from now to 5 April.

 

(iv) 9 December to the End of the Current Tax Year

Throughout the draft legislation, repeated use is made of the word ‘award’.  In other words it matters when the bonuses are awarded, not necessarily when they are paid.  BPT is intended to apply to bonus pools created and awarded within what remains of the current tax year, and, if we are to believe the rhetoric, the purpose of BPT is to make banks and building societies think long and hard before allocating funds to the bonus pool rather than using those funds to shore up their balance sheets.

Anti-avoidance provisions mean the tax ought to apply even if the employer defers actual payment into the following (or ensuing) tax year, or seeks to re-time payment of the bonus by the use of loan notes etc.  To quote HMRC:

“Relevant Remuneration will be regarded as awarded if arrangements are made during the Chargeable Period….which…were the money paid….during the Charging Period, would be Relevant Remuneration awarded to or in respect of the employee during the Chargeable Period”

There is a notable exception to all of this, in that bonuses that the employer is already obliged to pay by virtue of a contractual undertaking that existed prior to 9 December are excluded for the purposes of BPT.

 

Excluded Awards

 

As already mentioned above, certain payments are excluded for the purposes of BPT

 

Regular Salary, Wages or Benefits

“Regular” in this context means that the amount does not vary according to the performance of the business, the contribution to that performance made by the employee, the performance of any duty or duties by the employee, or any other consideration

 

Contractual Obligation

A contractual obligation is taken to arise when the amount payable is fixed or is capable of becoming fixed without the exercise of discretion by any person, or where the total amount payable to a group of employees, of which the relevant employee is part, is fixed or capable of becoming fixed without the exercise of discretion by any person.

However, contractual obligations that are put in place on or after 9 December will not be excluded payments for the purposes of BPT

 

Share-Related Awards

Any part of the bonus awarded in the form of shares under either an approved Share Incentive Plan or SAYE share option scheme will be excluded for the purposes of BPT.  Otherwise the award of any employment-related securities may be relevant remuneration for the purposes of BPT.

 

Anti-Avoidance

 

Mention has already been made of various targeted anti-avoidance provisions.  In addition the draft legislation contains a general catch-all provision to the effect 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.

“In particular, it will not be possible to avoid bank payroll tax by the use of loans which are in substance earnings or by channelling a bonus through an employee benefit trust or similar intermediary vehicle.”

 

Conclusion

 

As stated at the start of this note, and in our Pre-Budget Report commentary, the important thing to note here is that primarily BPT is a tax on the employer, the intention of which, at least in part, is to force behaviour change on banks and building societies.

If we assume that an affected bank or building society is in the process of allocating funds to the bonus pool, £100m of which (say) would be chargeable remuneration for the purposes of BPT, and we further assume that the bank or building society concerned has not allocated all of its surpluses for the year to the bonus pool, then the choices now facing that employer in essence are as follows:

* Pay the £100m as planned, and foot the bill for the £50m of BPT that arises by paying out of reserves

* Pay the BPT out of the bonus pool, reducing the amount available for distribution to £66.7m

* Concoct some sort of hybrid of the first two options so that the ‘pain’ is shared between employer and employee alike

* Do not pay any bonus and divert the £100m to the company’s balance sheet, thereby avoiding BPT altogether

 

Sadly the employee, of course, will simply be on the receiving end of whatever decision the employer takes.

Finally, it is worth noting that although the tax is envisaged as a one-off measure, the Government’s stated intention is that “in the longer term the [affected institutions’] remuneration practices will be changed as a result of corporate governance and regulatory reforms”.  In other words changes to corporate governance guidance, to which boards of companies have a statutory duty to adhere, will make it difficult to justify awarding bonuses in preference to retaining capital on the balance sheet.  Furthermore the Government reserves the option to extend “the period of the [BPT] charge so that the tax remains in place until the relevant provisions of the Financial Services Bill come into force”.

 

UPDATE

 

On 18 December, HMRC announced that in response to questions from various representatives of the Financial Services industry, it was further ‘clarifying’ its definition of banks and banking groups.

 

To ensure that the definition of ‘bank’ and ‘banking group’ applies as HMRC originally intended it is proposed that the draft legislation be amended in the following ways:

* Limit the definitions of ‘UK resident bank’ and ‘relevant foreign bank’, so that, for a non-deposit taker, they only apply to a 'person' which is a full scope BIPRU 730k investment firm (and whose activities consist wholly or mainly of relevant regulated activities)

* In this context a 'person' which would be a full scope BIPRU 730K investment firm but for the fact that its head office is not in the United Kingdom is to be treated as being one

 

In addition, it is proposed to add the following to the list of ‘excluded companies’:

* A company in a group that is not a deposit taker and is only carrying on relevant regulated activities on behalf of an insurance company in the same group

* A company that does not carry on any relevant regulated activities other than as a manager of a pension scheme

* A company whose activities consist wholly or mainly in acting as the operator of a collective investment scheme (within the meaning of Part 17 of FISMA 2000)

* An exempt BIPRU commodities firm

 

HMRC will also make changes to remove prime brokers who are full scope BIPRU 730K firms from the scope of the tax, and to exclude non-banking financial service groups that are incorrectly characterised by the rules as ‘banking groups’ simply because the group structure includes a company with banking activity, even though that is a minor activity within the group as a whole. Whilst the bank should be in scope the rest of the group should not.

 

The effect of these measures should be to ensure that the tax applies essentially to institutions which ‘the man in the street’ would understand to be banks and building societies, and not to asset managers, insurance companies, stockbrokers, commodity brokers, etc.

 

Simon Pimblett

December 2009