Banking Bonus Levy - The Latest

The pre budget report introduced a new 50% banking payroll tax ("BPT") upon banks that provide a bonus exceeding £25,000 to a banking employee directly or through an intermediary. As explained below, the wording of the announcement has caused confusion among the financial services industry. The Treasury has moved quickly to clarify the current position.

Overview

Key features of the BPT:

• The new rules take effect from pre budget report day 9 December 2009 and will be operative until 5 April 2010 for all discretionary bonuses that are awarded;
• The BPT will broadly apply to employees performing ‘banking services’ who are either UK resident or perform UK duties and are awarded a bonus between 9 December 2009 and 5 April 2010;
• It will not apply where the payer has no discretion as to the amount of the bonus due to a contractual obligation existing as at 9 December 2009;
• The tax liability will fall on the bank and will be chargeable at the rate of 50% on the amount by which the bonus exceeds £25,000;
• The BPT will be payable on 31 August 2010 and will not be deductible when calculating the bank’s taxable profits or losses; and
• Anti avoidance measures will be put in place to combat schemes to circumvent the BPT, for example through the use of loans or employee benefit trust schemes or in other ways where, in substance, a bonus exceeding £25,000 has been awarded. The award of shares under an approved share incentive plan and share options granted under a SAYE option scheme are not caught by the anti avoidance provisions.

Scope

The initial draft legislation defines a "bank" by reference to various permitted activities under the Regulated Activities Order. This includes entities which are engaged in:

• dealing in investments as principal;
• dealing in investments as agent;
• arranging deals in investments; and
• safeguarding and administering investments.

This leaves open the possibility that many investment firms (bank-owned or otherwise), including investment managers, authorised fund managers, depositaries/trustees and fund supermarkets are within the scope of BPT which appears inconsistent with the political aims of the BPT.

Updates since the pre budget report

HM Revenue and Customs ("HMRC") have informally indicated at industry meetings and forums that the scope of the legislation was not designed to catch the types of investment firms listed above and are currently seeing how the necessary legislative changes can be made. HMRC have indicated that the BPT applies to the bonuses of employees of banks and banking groups who are performing or supporting banking activities. It does not apply to non-banking activities outside banking groups such as insurance companies, asset management and stockbrokers. It does not apply to employees in banking groups who are not engaged in banking activities.

This would indicate that asset management groups are going to be excluded but those asset management groups which are part of a banking group may still be within the scope of the legislation depending on their activities. Employees of a banking group’s asset management arm may be outside the scope of the BPT if they are not engaged in banking activities.

Further HMRC clarification is expected tomorrow. As soon as there further announcements we will be reporting them.

If you have any queries regarding the proposals, please do not hesitate to contact your usual Buzzacott contact