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Bank Payroll Tax – How will it Impact Your Business?
The UK's pre-budget report delivered on 9 December 2009 announced a new Bank Payroll Tax that applies to banks and building societies on bonuses over ?25,000. The stated aim is to encourage banks to consider their capital position and make appropriate risk adjustments when setting the level of bonus payments. The concept is simple, but the implementation will be complex and have negative commercial implications for the UK's financial service industry.
Taxand UK outlines to whom this tax will apply; how it operates; and the practical
implications and applications for businesses.
In broad terms, the Bank Payroll Tax:
- is a 50 per cent, one-off tax payable by a bank or building society (not the employee) on any bonus which exceeds ?25,000 per person
- applies to "bonuses", no matter how or in what form they are delivered between 9 December 2009 and 5 April 2010
- is not deductible in computing profits or losses for the purposes of corporation tax.
It is only possible to understand the tax if the meaning of each of the key terms is fully analysed. The main points, outlined below are based on draft legislation published at the time of the PBR. However, some definitions, particularly the definition of a 'bank', were widely drafted and caught many more taxpayers than originally intended which led to a furore of representations and the announcement of amendments to the draft legislation.
Definition of bank
A bank is defined as a company that is authorised by the UK's financial regulator which wholly or mainly carries out the following regulated activities:
- accepts deposits
- deals in investments as principal or agent
- arranges deals in investments
- safeguards and administers investments
- regulates mortgage contracts.
For non-deposit takers, the tax will only apply to those companies which are full scope 'BIRPU 730k' investments firms. These are broadly firms that are required to maintain EUR730,000 under the Capital Adequacy Directive.
Certain companies are excluded from the definition, namely insurance companies, investment trusts, open-ended investment companies, friendly societies, credit unions, pension scheme managers and operators of Collective Investment Schemes
Relevant Banking Employee
Once it is established that a person works for a bank, the next step is to identify if they are a Relevant Banking Employee, qualified as:
- an employee of a bank
- employed in a banking employment
- a UK resident or the duties are at any time performed wholly or partly in the UK between 5 April 2009 and 5 April 2010.
A banking employee is one who has duties that are wholly or mainly concerned (whether directly or indirectly) with the regulated activities listed above, or with the lending of money.
Each affected company will have to review the duties each employee has carried out or will carry out during this tax year. If the company determines that an employee does not fall within the tax, then they will need to be able to prove it.
Chargeable Relevant Remuneration
It is now important to calculate the bonus paid. In effect, this includes earnings or a benefit provided by reason of employment:
- any amount, whether awarded in cash, through a loan, in shares or other equities, or a benefit in kind that is not a regular annual payment, whether payable immediately or on a deferred basis and whether taxable in the hands of the employee or not
- there was no contractual obligation entered into prior to 9 December 2009
- it is not excluded remuneration
- the aggregate amounts awarded exceed ?25,000
The 'supertax' on bankers' bonuses may well be more about politics, but it will surely add to the exodus from the UK of mobile executives, already encouraged by the 50% personal tax rate, driving away people and capital essential for growth and affecting the competiveness of the UK's financial services industry.
In the meantime, UK banks have the following choices:
(1) Pay "bonuses" as usual, and either:
- pay less to the relevant banking employees or
- pay the same amount to the relevant banking employees and suffer the additional costs.
(2) Pay only bonuses of up to ?25,000 and consider paying additional amounts after 6 April 2010. However,
- employees will then pay 50 per cent income tax
- there is a risk employees could be "poached" by other organisations that can pay a "sign on bonus," which does not appear to be subject to the bank payroll tax
- the amounts paid will be deductible for calculating profits and losses for the purposes of corporation tax.
(3) Remuneration Committees must consider:
- the implications of differing bonus amounts payable to employees with a relevant banking employment versus those not in such an employment
- the market environment both from a perspective of what other banks are doing
- the likelihood and the risk to the business of a key person or team being poached by the competition
- the international landscape.
Your Taxand contact for further queries is:
T. +44 207 663 0445