On 9 December 2009, the Chancellor of the Exchequer announced a "bank" payroll tax on certain discretionary "banking" bonuses paid by "banks" between 9 December 2009 and 6 April 2010. The levy is 50% of the total bonus amount paid, although contractual amounts already agreed and bonuses below £25,000 are not caught.

Draft legislation accompanied the announcement, but there is considerable uncertainty as to which companies are caught by the levy because the definition of "bank" is much broader than might be expected. The drafting of legislation itself is unclear on many other points too, including on what a "bonus" actually is.

This article considers relevant issues for financial services companies at the moment. However, there is a significant amount of lobbying and further Treasury announcements are expected. We will keep you informed of these as and when they are made and produce a fuller summary when the legislation is in a more advanced form.

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On 9 December 2009, the Chancellor of the Exchequer announced a "bank" payroll tax on certain discretionary "banking" bonuses paid by "banks" between 9 December 2009 and 6 April 2010. The levy is 50% of the total bonus amount paid, although contractual amounts already agreed and bonuses below £25,000 are not caught.

Draft legislation accompanied the announcement, but there is considerable uncertainty as to which companies are caught by the levy because the definition of "bank" is much broader than might be expected. The drafting of legislation itself is unclear on many other points too, including on what a "bonus" actually is.

This article considers relevant issues for financial services companies at the moment. However, there is a significant amount of lobbying and further Treasury announcements are expected. We will keep you informed of these as and when they are made and produce a fuller summary when the legislation is in a more advanced form.

1. An overview - What is bank payroll tax and when it is payable?

Bank payroll tax is payable

  • by a "taxable company"
  • when its "relevant banking employees"
  • are "awarded" during the "chargeable period" (i.e. between 9 December 2009 and 6 April 2010)
  • "relevant remuneration" above a £25,000 threshold

These terms are separately explained below. There are a considerable number of anti-avoidance provisions.

The tax is payable by the taxable company, not the employee, at a rate of 50% on all relevant remuneration awarded to each of its "relevant banking employees" above £25,000. The tax is payable on 31 August 2010. However, a further sting in the tail is that it is not corporation tax deductible and is in addition to any income tax and NICs which are payable.

2. Which companies are caught?

One of the surprises on closer analysis of the relevant legislation is that it is not just banks which are affected, although the explanatory memorandum just refers to "banking groups, banking entities and building societies".

There are three types of companies which are caught as a "taxable company".

2.1 The employing company is a UK resident bank or a relevant foreign bank

This definition covers far more companies than would normally be considered banks.

A company will be a UK resident bank if it is an authorised person under FSMA, which is UK tax resident and trading, and whose activities either include accepting deposits (where any activity is enough) or consist "wholly or mainly" of one or more of:

  • dealing in investments as principal
  • dealing in investments as agent
  • arranging deals in investments
  • safeguarding and administering investments, or
  • regulated mortgage contracts

Insurance companies, investment trusts, OEICs, friendly societies and credit unions are excluded companies and cannot be UK resident banks (or relevant foreign banks) (but, oddly they can still be taxable companies under other tests).

A company will be a "relevant foreign bank" if it is non-UK resident with a trading branch in the UK for tax purposes, which is authorised under FSMA (which includes "passported" into the UK from an EEA or relevant treaty state) and whose UK branch conducts any of the above activities to the required extent (i.e. "wholly or mainly", other than accepting deposits, where any activity is enough).

Although "wholly or mainly" is used in various places in existing tax legislation, nowhere is there a clear definition and this will have to be resolved in due course.

2.2 The employing company is a company in the same group as a UK resident bank or relevant foreign bank

A company in the same group as one of the above companies may also be caught. In broad terms (and there is considerable detail and so this definition is an oversimplification), a company will be caught if:

  • it is an over 50% subsidiary and in the same group as a UK resident or relevant foreign bank, and
  • it is an authorised person under FSMA or a company dealing in securities or (if it is a UK company) a company whose business consists wholly or mainly of, and the principal part of whose income is derived from, the making of investments.

This leads to some odd consequences as currently drafted.

2.3 The employing company is a building society or a company in a building society group which is a UK resident investment company or UK financial trading company

In practice, the legislation has the potential to catch:

  • Banks
  • Building societies
  • Stockbrokers and dealers
  • Other brokers (including insurance brokers)
  • Hedge funds and other private equity houses
  • Independent financial advisers
  • Investment managers
  • Operators of Multilateral Trading Facilities
  • Other types of company (including insurance companies and open-ended investment companies) which are in a group with any of the above

3. Which employees are caught?

You need to look at the status of employees receiving "bonuses".

The legislation only catches bonuses awarded to employees with duties which are "wholly or mainly concerned (whether directly or indirectly)" with activities which are relevant activities (see above - accepting deposits, dealing in investments as principal or as agent, arranging deals in investments, safeguarding and administering contracts, mortgages). This is clearly intended to be a limitation, but quite what is intended is unclear – are HR and IT directors caught, for example?

Additionally, in order for the tax to apply, the employee must either be resident in the UK or perform any (our emphasis) of his duties in the UK in the 2009/10 tax year. Merely spending one day working in the UK could therefore have (or more likely, have had) important cost implications.

4. What "remuneration" is caught?

This definition of remuneration is much wider than a "bonus" as popularly defined. It also potentially includes all salary, bonuses, employee share scheme awards, pension contributions and other benefits-in-kind, even loans, although in some cases there are clear valuation issues in working out what the amount of remuneration could be. The main exclusion here will be "regular" wages/earnings/benefits to reflect that the tax is only intended to tax "discretionary" bonuses.

Secondly, relevant remuneration up to £25,000 per employee is excluded from the scope of the legislation, with £25,000 having been set by the Government as a suitable limit on bonuses this year.

5. Awarded in the chargeable period

Once you have identified a relevant company, relevant employees and remuneration, you then need to look at when the relevant remuneration was awarded.

The tax only applies to relevant remuneration awarded between 9 December 2009 and 6 April 2010. Remuneration which had already been awarded before or which is awarded after the relevant period is therefore not caught.

The fact that an employee has to remain in employment after the date of an award does not prevent a contractual obligation arising at that stage (so leaver provisions are ignored for the purposes of whether something has been awarded for the purposes of bank payroll tax), but a contractual obligation only arises if the amount is "fixed or capable of becoming fixed without the any person exercising discretion."

How this particular test applies to even relatively straightforward deferred remuneration is difficult to determine and a number of scenarios need to be agreed with the Revenue.

Companies which are due to award bonuses after the relevant period on the basis of an established precedent are, currently, in the clear, but any deliberate delay of bonuses until after 5 April 2010 is likely to fall foul of anti-avoidance legislation and give rise to a payment of tax. Equally, the Government has reserved the right to extend the relevant period if pay practices do not conform with its expectations and/or pay restraint measures still to be announced in the Financial Services Bill have not yet taken effect.

At the moment, there seems to be some lobbying so that those with 31 March 2010 year ends, who would normally pay bonuses in May 2010, are also automatically caught.

6. Are there ways to avoid the tax liability?

If "banks" do not award bonuses in the period, then no charge arises, which is a choice openly given by the Treasury to the banks. However, for a bonus programme successfully to be pulled or scaled back, there can be no arrangement (whether enforceable or not) to pay the relevant sums in the future, in addition to having to address the difficult employment law and employee relation issues this raises in the interim.

7. What is the future?

All the professional tax adviser bodies and industry groups are urgently requesting clarification of the legislation from the Treasury and Revenue. Pending this, which should emerge shortly, it seems premature for any non-banks to take any action – particularly since anti-avoidance steps are counteracted under this legislation. However, banks themselves and their groups should probably budget for the worst and start identifying the following:

  • which group companies/businesses are caught – the "wholly or mainly" test
  • which employees are caught
  • identifying remuneration which is not caught – in particular, contractual bonuses
  • should bonus programmes be adapted.

It is likely that the Treasury/Revenue will produce a substantial amount of guidance on this as well as publish the necessary regulations for the detailed collection of the tax.

The relevant draft legislation can be found by clicking here (www.hmrc.gov.uk/pbr2009/bank-payroll.htm).

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 17/12/2009.