Bank Payroll Tax - How are the Banks Responding?
It hardly needs saying that the Bank Payroll Tax - a 50% levy on bank bonuses on top of existing Income Tax and National Insurance liabilities - has gone down badly with the banking community. In broad terms the tax will apply to bonuses greater than £25,000 per employee where these bonuses are awarded between 9 December 2009 and 5 April 2010.
The subject of this 'Supertax' has generated considerable press comment, by no means all of it accurate, and while the wider debate about the rights and wrongs of the tax will doubtless continue throughout this election year - the legislation is still draft and thus must go through the Parliamentary process - bank senior management and HR functions will now need to work out how to respond, and quickly. Responding to the tax presents a considerable challenge given that it is a new concept, with the rules still subject to significant change.
For some potentially affected groups there will be mileage in considering whether the group as a whole can be excluded from the scope of the tax. Already lobbying has prompted the government to narrow the definition of "Taxable company" since the original draft legislation. It is now expected to apply primarily to deposit takers and full scope BIPRU 730k firms, but other companies in the same group as such businesses will need to consider their position carefully, and also stand by for the possibility of further changes to the scope of the tax.
The perils of delay
HMRC has stated publicly that the tax will not be extended beyond 5 April. However, there is also a stated intention to target blatant deferral of bonuses into the new tax year, so that the Bank Payroll Tax would probably still apply in such cases. In addition, deferral could leave banks in the worst of both worlds given that any bonuses paid on or after 6 April will be subject to the new 50% rate of income tax as well. It also remains to be seen whether tighter FSA rules on bonuses will be in place by April - HMRC's Technical Note certainly seems to envisage this. So, overall, it does not appear that deferral will be an attractive option for many banking groups.
Long Term Incentive Plans
Broadly speaking, Bank Payroll Tax will not apply to bonus awards where the contractual obligation to make the award arose before 9 December 2009. Therefore, guaranteed bonuses are likely to be exempt, notwithstanding the fact that they have been the subject of much criticism in the past.
Amounts awarded under Long Term Incentive Plans may or may not be caught, and a careful analysis will be required to determine whether the contractual obligation for such awards arose before or after 9 December.
Some employees caught - but not all
For deposit takers and others who are to be subject to the tax, a further aspect of the rules should be considered. Once analysed, this aspect may help to limit the scope of the tax. The Bank Payroll Tax applies not to all employees, but instead just to those in a "Banking Employment". Whilst the definition of a "Banking Employment" is not entirely straightforward, in summary it means employment directly or indirectly in support of money-lending and other relevant regulated activities, as further defined. Whilst for some banks this may mean virtually all employees, for some larger banks it may be possible to carve out select groups of employees by using a filter process.
Given the fact that the bonus period for most banks is already upon us, and many banks and other financial institutions will need to accrue for the tax in their 31 December 2009 accounts, such calculations need to be performed now.
Internationally mobile employees
When the Bank Payroll Tax was first announced, there was concern that overseas-based employees could be fully subject to the tax if they had spent even one day in the UK on business in the period for which their bonus was payable. Helpfully, HMRC has now confirmed that such an employee will only be taxed if they spent more than 60 days in the UK during the 2009/ 2010 tax year. Whilst this clarification is useful, it still underlines the fact that some employees who are not UK tax resident can trigger a Bank Payroll Tax liability for their employers. Many banks will still need to perform an exercise to determine what, if any, liability exists in respect of short-term inbound secondees and other non-UK employees.
In conclusion, whilst the Bank Payroll Tax is still subject to change, there are immediate actions that Banks can take to make sure that they understand all of the situations where it will and will not apply, and have not missed any pitfalls and opportunities.
Points for immediate consideration
- Are you sure about the precise status of your firm under the Bank Payroll Tax?
- What is the rough impact of the tax on this year's bonus pool?
- Will it be possible to exclude some groups of employees from the scope of the tax?
- How will you stay on top of changes to the scope of the tax between now and the payment date for this year's bonus round?
For a discussion on Bank Payroll Tax please contact Tom Aston on (0) 20 7311 5811 or Mike Eckes (0) 20 7311 2743.
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Trends in the presentation of financial statements and disclosure of information by European banks 2009.