Pre-Budget Report 2009 commentaries - Banking sector

"The commentaries below are written in general terms. Details can also be found in our downloadable Pre-Budget Report brochure. You are strongly recommended to seek specific advice before taking any action based on the information given, both in the commentaries and in the publication."

Bank Payroll Tax

With effect from 9 December 2009, a new wide-ranging payroll tax will apply where bonuses are paid or similar arrangements are entered into for ‘banking employees’. The legislation is expressed to be effective for relevant arrangements until 5April 2010, though there is an indication in the details released that it may be continued thereafter until a proposed Financial Services Bill comes into force. The rate of tax is 50% and this tax is not deductible when computing the bank’s taxable profit.

Broadly, a taxable company will be one that is a bank, a building society, a UK resident investment company or financial trading company within a banking or building society group, or an equivalent UK branch. The company will have to be wholly or mainly carrying out the ‘relevant regulated activities’ to be caught.

A financial trading company is one whose trade consists wholly or partly in dealing in securities. There are detailed provisions for members of groups.

The term ‘relevant banking employee’ does not only cover bankers but similarly extends to those who wholly or mainly carry out ‘relevant regulated activities’. These include dealing in investments both as principal and agent and safeguarding and administering investments. These activities are defined and regulated under Financial Services and Markets Act 2000 (FISMA). These provisions have no effect on the taxability or otherwise of any award as far as the employee is concerned.

Amounts of relevant remuneration over £25,000 (whether paid in one go or in several instalments) will be caught. For the purposes of calculating the amount of charge, the value of the remuneration will be, broadly, the greater of market value and the cost of its provision. Tax will be payable on 31 August 2010.

Detailed anti-avoidance provisions have been published. The starting point is that the employee does not himself have to be liable to income tax on any relevant amount in order for the charge to arise. The tax is not intended to be similar to NIC but rather much broader.

The relevant remuneration that is caught is much broader than ‘earnings’ which is simply money or money’s worth. It extends to other benefits whether provided by the employer or a third party such as an employee benefit trust (EBT). There are particularly severe provisions concerning loans which can be treated as remuneration for this purpose even though the individual may have to repay the amount in question.

Similarly, it is not possible to make current arrangements for future payment after 5 April 2010 without being immediately liable. This will mean that payments into vehicles such as EBTs may well be caught.

The provisions extend to most forms of reward and certainly include company shares. Where assets are restricted in value, their full unrestricted value is the basis of charge.

Some remuneration is excluded from these provisions. This includes payments under approved all-employee share plans (share incentive plans (SIPS) and Save As You Earn (SAYE) schemes) but not discretionary approved company share option plan (CSOP) arrangements, unapproved options or other long term incentive plan (LTIP) awards. Awards contractually promised before 9 December 2009 are also excluded as is ordinary contractual pay.

Comment

The tax does not attempt to target what might be thought to have been the reward for activities considered objectionable but rather it assumes that any bonus in the sector is necessarily offensive. All employees are tarred with the same brush regardless of any genuine merit whatever, or indeed regardless of the commercial, as opposed to contractual, needs of the employer to incentivise and retain employees in any given case.

This, together with the very severe threshold level at which this tax is set (£25,000), does suggest that it is intended to be a one-off arrangement and not to be continued indefinitely.

It has to be said that the volume of highly-developed material immediately available on the matter, including draft legislation, and the very comprehensive anti-avoidance proposals suggests that this has not been a recent decision but has been thought about by someone for some time.

Even so, the tax is almost of necessity highly arbitrary in its application and effect. It is highly likely that blameless employees carrying out worthy, risk-free or risk-reducing activities will be caught. Similarly, it is possible that some employees who might have been expected to have been covered will not be caught, perhaps because their employer’s trade is sufficiently broad that it is not wholly or mainly carrying on regulated activity.

Given the draconian and arbitrary nature of the legislation it is to be expected that close scrutiny will be given to these provisions by employers to see whether or not any individual bonus can be paid in any particular case.

Code of Practice on Taxation for Banks

The Government have announced a package of measures for banks and published in a consultation response document an updated version of The Code of Practice on Taxation for banks. The code has several components:

it describes what the Government believes to be good practice for governance and decision-making in banks, including tax planning and asks banks to have tax governance integrated into business decision-making;
following the ‘spirit of the law’ will mean banks should undertake tax planning to support their business operations, rather than use them to achieve tax results that are contrary to the ‘intentions of parliament’ and for HMRC to commit to comment on plans where the bank wishes to discuss them; and
the code encourages banks to work with HMRC to build mutually open and transparent relationships.

A bank’s decision on adoption of the code, and its success in implementing it, will not affect the bank’s relationship with HMRC; HMRC’s objective is to establish open and transparent relationships with all large business customers. But HMRC will wish to discuss with banks that adopt the code how they are complying with it and will evaluate this as part of the normal risk-assessment process, seeking to understand both the bank’s overall implementation of the code, and the reasons behind particular decisions.

Comment:

There has been a consultation process with the banking sector and there are specific concerns around:

the potential for conflict for compliance with the code against responsibilities to shareholders;
who is the arbiter of “the intentions of parliament”; and
what does “spirit of the law” mean.

A well known instance illustrating the principal concerns with HMRC’s attempt to influence taxpayer’s behaviour can be derived from the Arctic Systems case, (Jones v Garnett (2007) STC 1536). The decision of the courts was contrary to the views of HMRC and ministers, but in line with the opinion of other tax commentators.

An open question is, therefore, whether the code of conduct for Banks, when conscientiously applied by HMRC in the context of the Arctic Systems case, would have produced the correct outcome as found by the House of Lords. If it might not have done, there must be a concern that the Code could have the unfortunate effect of denying banks or their customers a just outcome in any given case.

We shall have to wait and see whether the code is seen as a matter for the banking sector only, or simply as a stepping stone for rolling the principle out to other sectors, law firms, accountancy practices, etc.