Bank Payroll Tax – New one-off tax on bonuses in the banking industryFriday, December 18th, 2009
A new one-off tax, known as the “bank payroll tax” takes immediate effect (i.e. from 9 December 2009). It will be paid by banking groups, investment companies and building societies on payments, i.e. discretionary and contractual bonuses, made to banking employees over and above their salaries and benefits. The tax is not paid by the employees concerned and does not, therefore, serve to impose on employees a further tax on top of the PAYE tax and NICs that are already due on the payments.
The rate of the bank payroll tax is 50% and will be due on the excess above £25,000 of total remuneration, excluding regular salary or wages, regular benefits, shares awarded under specified share schemes, and any payments in respect of contractual obligations that arose before 9 December 2009. Payment will be due on 31 August 2010.
The legislation includes measures to prevent avoidance of the bank payroll tax through the use of loans, multiple employments with the same employer and payments made by intermediaries.
The bank payroll tax does not serve to reduce a business’s profits when calculating liabilities for corporation tax.
The Government’s intention is to encourage change in the remuneration practices that contributed to excessive risk-taking by the banking industry by encouraging the development of sustainable long-term remuneration policies. Although the tax only applies currently until 5 April 2010, it may be extended until the provisions of the Financial Services Bill come into force. In the longer term, the intention is to promote change in remuneration practices by means of corporate governance and regulatory reforms. A Code of Practice on taxation and on governance and decision-making in banks, including tax planning, is also to be introduced.
The following details are based on draft legislation and may, therefore, change in some respects when finally enacted.
The legislation requires a “taxable company” to pay bank payroll tax (tax) at a rate of 50% of the aggregate of the “amount” of “relevant remuneration”, “awarded” during “the chargeable period” (even if actually paid or provided later) to “relevant banking employees” in respect of “relevant regulated activities”, to the extent that the remuneration exceeds £25,000 in value. There is only one £25,000 exempt amount, even if more than one bonus is paid in the period, or an employee has “multiple employments” with a number of associated taxable companies.
The tax will become due and payable to HMRC on 31 August 2010. The amount paid or payable may not be deducted when calculating profits or losses for corporation tax purposes.
The “chargeable period”, as currently defined, is 9 December 2009 to 5 April 2010.
In very general terms (although the legislation is extremely detailed), a company is a “taxable company”, if it is
- a UK resident investment company or UK resident financial trading company in a banking group
- a building society
- a UK resident investment company or UK resident financial trading company in a building society group, or
- a UK branch of a foreign bank or the UK branch of a foreign financial trading company in a banking group.
Tax is due on “relevant remuneration”, i.e.
- earnings from employment with the taxable company that are liable for income tax under section 62 of the Income Tax (Earnings and Pensions) Act 2003 (principally tax due under PAYE and on benefits reported under P11D/P9D rules), and
- any other benefits provided by reason of the employment, whether or not chargeable to income tax.
However, “relevant remuneration” does not include “excluded remuneration”, i.e.
- anything that is “regular” salary or wages or a “regular” benefit,
- anything for which a “contractual obligation” to pay or provide it arose before the chargeable period,
- any shares awarded under an approved share incentive plan, or
- any share option granted under an SAYE option scheme.
A salary, wage or benefit is only “regular” to the extent that it does not vary according to
- the performance of any business of, or connected with, the taxable company,
- the contribution made by the employee to such performance,
- the performance by the employee of the duties of the employment, or
- any similar considerations.
A “contractual obligation” arises only when the amount due to an employee, or to a number of employees including the employee, is fixed, or capable of being fixed, without the exercise of discretion by anyone. However, with reference to contractual obligations entered into before the chargeable period, a contractual obligation arises whether or not payment or provision of something is dependent on the employee complying with any conditions.
Relevant remuneration is “awarded” during the chargeable period if
- a contractual obligation arises during that period, or
- it is paid or provided during that period without any such obligation having arisen during that period.
Relevant remuneration will be treated as being “awarded” if
- an individual is treated as a “relevant banking employee” (see below) because of providing banking services to a taxable company under a contract between the taxable company and an intermediary.
- an arrangement is made during the chargeable period for remuneration to be paid or provided which, if it were paid or provided during the chargeable period, would be relevant remuneration.
- a loan is provided, whether or not under a contractual obligation, during the chargeable period and its purpose, or one of its main purposes, is to reduce or remove a liability to bank payroll tax.
“Amount” of remuneration
The “amount” of relevant remuneration is
- if it is money, its amount when awarded,
- if it is money’s worth, i.e. of direct monetary value or capable of being converted into something of monetary value to the employee, the amount of the money’s worth when awarded, or
- if it is a benefit not constituting earnings, the cost of providing it.
If the amount of remuneration is not fixed at the time it is awarded during the chargeable period (because it will be paid or provided at a future time), the amount is what it would be reasonable to assume it would be if and when it is paid or provided.
If, at the time the remuneration is awarded, its market value exceeds what would otherwise be its amount, the amount is its market value.
If remuneration is subject to any restriction or restrictions, i.e. any condition or provision that causes its value to be less than it would otherwise be, the restriction or restrictions are ignored in determining its amount.
In the case of a loan that is treated as being awarded during the chargeable period, the amount is the amount of the loan or, if the amount is not fixed, the amount that it is reasonable to assume will be loaned.
“Relevant banking employees”
Employees are “relevant banking employees” if
- they are employed in “banking employment” and
- are resident in the United Kingdom in tax year 2009/10, or
- their duties are, at any time of that tax year, performed wholly or partly in the United Kingdom.
Employment is “banking employment” if the duties are wholly or mainly concerned (whether directly or indirectly) with activities that are
- “relevant regulated activities”, or
- otherwise consist of the lending of money.
Activities that are “relevant regulated activities” are
- accepting deposits, i.e. providing current accounts and deposit accounts to retail customers,
- dealing in investment as principal, i.e. trading in derivatives, bonds commodities etc. on their own account,
- dealing in investments as agent i.e. trading in the above types of investments on behalf of clients,
- arranging deals in investments,
- safeguarding and administering investments on behalf of clients, and
- regulated mortgage contracts, i.e. carrying out retail mortgage lending.
The condition “directly or indirectly” means individuals not directly employed by a taxable company would still be in “banking employment” and treated as employees of the taxable company if they perform banking services personally for a taxable company under a contract between an intermediary and the taxable company. Although not yet included in the draft legislation, similar provisions will apply to employees employed by a partnership.
If an employee has more than one employment with a taxable company as a relevant banking employee, tax is due on the amount by which the aggregate value of relevant remuneration exceeds £25,000.
If an employee has employments with more than one associated taxable company, the £25,000 threshold is divided by the number of companies and allocated accordingly.
For this purpose, taxable companies are associated if one of them is under the control of the other, or one of them is under the control of a third person who controls or who is under the control of the other.
The legislation includes a number of anti-avoidance measures that are intended to ensure that banks cannot award bonuses and, at the same time, avoid the new charge. In particular, it will not be possible to avoid bank payroll tax by the use of loans which are substantially earnings or by channelling a bonus through an employee benefit trust or similar intermediary vehicle.
Collection and management
The current draft of the legislation does not include details of collection and management. Future draft legislation will
- require banks to keep full records of all bonus payments of over £25,000 awarded during the chargeable period, together with documents and other evidence necessary to demonstrate whether they fall within the scope of the bank payroll tax,
- require banks to report details of all bonuses over £25,000 awarded during the chargeable period, whether or not they believe that the bank payroll tax applies to them, and
- provide powers for penalties to be applied where banks fail to retain relevant records, submit incorrect returns or fail to submit returns by the statutory date.
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