2009 Pre-Budget Report: new bank payroll tax on financial sector companies which pay bonuses before 6 April 2010 | Practical Law

2009 Pre-Budget Report: new bank payroll tax on financial sector companies which pay bonuses before 6 April 2010 | Practical Law

An update about the new bank payroll tax announced in the 2009 Pre-Budget Report on 9 December 2009.

2009 Pre-Budget Report: new bank payroll tax on financial sector companies which pay bonuses before 6 April 2010

by PLC Share Schemes & Incentives
Published on 09 Dec 2009 • United Kingdom
An update about the new bank payroll tax announced in the 2009 Pre-Budget Report on 9 December 2009.
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In the 2009 Pre-Budget Report, the Chancellor announced a new one-off bank payroll tax (BPT) payable by banks and other financial services firms. The BPT will be chargeable at 50% on bonuses (in any form) exceeding £25,000 per employee awarded between 12.30pm on 9 December 2009 and 5 April 2010, although certain payments (including existing contractual arrangements) are excluded. The draft legislation to enact the BPT includes carefully drafted anti-avoidance provisions.

Background

There is public fury over the likelihood of large bonus payments in the City over the next few months, given:
  • The high levels of financial support which the banking system has received.
  • The widespread perception that remuneration structures which promoted inappropriate risk-taking contributed to the 2007/08 banking crisis and the resulting global recession.
There is also acute political concern and potential embarrassment over these issues, especially for the UK government in the run up to the 2010 general election. In addition, it seems that the government would like to curb bankers' bonuses without exercising its special powers over those banks which are largely publicly owned, as this might damage their competitive position and so devalue the public investment in them.
Various projects to reform financial sector remuneration are in progress, including:
However, these initiatives seem unable to bring about change quickly enough to prevent large bonus payments in the City in the winter of 2009/10 (and might never curb large bonuses enough to satisfy the current public mood).

Bank Payroll Tax

The 2009 Pre-Budget Report, published on 9 December 2009, announced a new, one-off bank payroll tax (BPT).
Also on 9 December 2009, HM Revenue & Customs (HMRC) published:
  • A Technical Note on the BPT (Technical Note); and
  • Draft BPT legislation (BPT Schedule).
The BPT will be payable on 31 August 2010 (paragraph 15, BPT Schedule):
The BPT will be charged at a rate of 50% on the total of relevant remuneration paid in the BPT period in excess of the £25,000 per employee limit (paragraphs 1 and 2, BPT Schedule).
BPT liability will be additional to any income tax and employee (primary class 1) national insurance contributions (NICs) payable on the relevant bonuses by employees and any employer (secondary class 1) NICs payable by the employer.
BPT liability will not be deductible in computing the employer's own profits or losses for corporation tax or income tax purposes (paragraph 16, BPT Schedule).
The BPT Schedule includes extensive and apparently carefully considered anti-avoidance provisions (see Anti-avoidance provisions).
The BPT Schedule also gives HMRC power to make regulations for the administration of BPT, notably including provisions for the publication of "details of deliberate defaulters" (paragraph 18(2)(c), BPT Schedule).
Firms subject to the BPT will have to record and report bonus payments made during the BPT charging period, whether or not they believe BPT is due on those bonuses (page 11, Technical Note).

Firms subject to the BPT

[Note: HMRC issued revised guidance on the firms which will be subject to the BPT on 18 December 2009 - see Legal update, HMRC narrows scope of new Bank Payroll Tax.]
The BPT is payable by a wide range of companies. Working out whether a particular City firm is liable may be quite complicated, depending on the make-up and relative importance of its different activities.
Taxable companies include:
  • Any "UK resident bank", which has a broader meaning than might be expected - broadly any UK resident trading company (other than an insurance company, investment trust, open ended investment company (OEIC), friendly society, credit union or building society) that is either:
    • an authorised person whose activities:
      • include the regulated activity of accepting deposits (ie, a retail bank); or
      • consist wholly or mainly of any one or more of the regulated activities of accepting deposits, dealing in investments as principal, dealing in investments as agent, arranging deals in investments, safeguarding and administering investments and regulated mortgage contracts; or
    • a member of a partnership (including a limited liability partnership (LLP)) that is authorised and meets the regulated activity requirements set out in the preceding paragraph.
    (Paragraph 19, BPT Schedule.)
  • Any "relevant foreign bank", which means a non-UK resident company that has a UK permanent establishment and is an authorised person with similar trading activities (or in a similar authorised trading partnership) to those which would make a UK resident company a UK resident bank (again, other than an insurance company, investment trust, OEIC, friendly society, credit union or building society).
    (Paragraph 19, BPT Schedule.)
  • Any building society.
  • Any "UK resident investment company" or "UK resident financial trading company" in either a banking group or the same group as a building society (for more details, see paragraphs 3, 21, 23 and 24, BPT Schedule).
  • Any "relevant foreign financial trading company" in a banking group (for more details, see paragraphs 3, 21 and 24, BPT Schedule).

Remuneration subject to the BPT

The BPT Schedule does not mention "bonuses". Instead BPT arises on anything (whether subject to UK income tax or not) which is:
  • Earnings (as defined in section 62 of the Income Tax (Earnings and Pensions) Act 2003) in relation to; or
  • Not earnings, but still a "benefit provided by reason of",
the employment of relevant banking employees (see Individuals whose remuneration will trigger the BPT), paid or provided in the BPT period, or to which a contractual entitlement arises during the BPT period, and which neither:
  • Falls below the £25,000 per employee limit; nor
  • Is "excluded remuneration", which means:
    • any "regular" salary, wages or other benefit, where "regular" means salary etc. which cannot vary according to business or individual performance or any similar considerations;
    • anything paid or provided under a contractual obligation which arose before the BPT period, where a contractual obligation is not taken to arise until the amount to be paid (either to the individual employee, or in total to a group including that individual) is fixed, or capable of becoming fixed without any exercise of discretion;
    • any award of shares under an HMRC-approved share incentive plan (SIP); and
    • any HMRC-approved SAYE option.
(Paragraphs 4 and 5, BPT Schedule.)

Individuals whose remuneration will trigger the BPT

BPT liability is calculated on the total of chargeable payments awarded to "relevant banking employees", which means:
  • Employees (or directors or other officers who are not employees) of a taxable company (or individuals providing equivalent personal services to a taxable company through an intermediary);
  • Who are UK resident in tax year 2009/10 or whose duties are performed in the UK (in whole or part) at any time in that year;
  • Whose duties are wholly or mainly (and directly or indirectly) concerned with either:
    • regulated activities which would qualify a company to be a taxable UK or foreign bank (see Firms subject to the BPT); or
    • other activities which "consist of the lending of money".
(Paragraphs 8, 10 and 25(1), BPT Schedule.)
HMRC also comments that it is considering introducing further provisions to apply the BPT where similar activities are undertaken by employees of a partnership associated with a "UK resident bank" or "relevant foreign bank" (see Firms subject to the BPT) (page 5, Technical Note).

Anti-avoidance provisions

The BPT Schedule has obviously been carefully drafted with possible avoidance in mind. In addition to the provisions to:
the BPT Schedule includes:
  • An anti-avoidance provision which will give rise to a BPT liability if any arrangements (whether or not legally binding) are made to provide a reward equivalent to one which would attract BPT either outside the BPT period or in a form which is not subject to the BPT.
    (Paragraph 13, BPT Schedule).
  • A separate provision which will give rise to a BPT liability if arrangements are made to defer a reward until after the BPT period.
    (Paragraph 11, BPT Schedule.)
  • A provision which will give rise to a BPT liability if loans, or obligations to provide loans, are made, with any tax avoidance purpose, "to or in respect of" a relevant banking employee.
    (Paragraph 12, BPT Schedule.)
  • A provision which prevents an individual claiming more than one £25,000 limit through multiple employments (whether with one or several companies).
    (Paragraph 9, BPT Schedule.)
  • A definition of membership of a banking group which:
    • includes companies which left the group immediately before the BPT period; and
    • specifies that companies will only be treated as leaving the group if they do so on an arm's length basis for commercial reasons (which cannot be the obtaining of a tax advantage), or as a result of a regulatory recommendation.
    (Paragraph 21, especially 21(1) and 21(8) - (9), BPT Schedule.)
  • Valuation provisions which mean:
    • the BPT will still arise on a "reasonable" assumption of value where the value of an award is not fixed;
    • chargeable value cannot be reduced by applying restrictions; and
    • chargeable value cannot be less than the market value (as it would be computed for capital gains tax (CGT) purposes).
    (Paragraphs 7 and 25(1), BPT Schedule.)
As yet, it seems no provision has been made to bring schemes to avoid BPT within the tax avoidance scheme disclosure obligations. However, it seems likely that further anti-avoidance refinements will be added to the BPT Schedule if thought necessary.

Source

2009 Pre-Budget Report - PBRN 02 - Bank Payroll Tax, HMRC, 9 December 2009.
2009 Pre-Budget Report - Bank Payroll Tax: Technical Note, Draft legislation and Explanatory Notes, HMRC, 9 December 2009.