The main announcement in the Pre-Budget Report 2009 (PBR) of interest to the investment funds sector was the fact that the new, temporary 50% bank payroll tax will be levied not just on banks but on other “taxable companies” to the extent that they pay their employees bonuses exceeding £25,000 (Bank Payroll Tax). The tax has immediate effect. The stated purpose of introducing the tax is to encourage such companies to retain their profits to improve their financial strength, rather than paying out large amounts of profits in bonuses.
Of key concern will be (i) whether UK resident companies or UK branches of foreign companies engaged in investment management business fall within the scope of “taxable companies”, and (ii) if so, whether their employees would be carrying out the targeted activities. Although it is expected that most companies engaged in such business will not be affected, the draft legislation (and lack of clarification from HMRC at the time of writing) is sufficient to cause concern for the industry. Investment management companies that are part of banking groups shall be particularly concerned. It has been reported but, at the time of writing, not confirmed, that HMRC will clarify the proposals in this regard. This briefing primarily therefore considers the scope of the proposed Bank Payroll Tax, as contained in the draft legislation published this week. The decision tree at the end of this briefing should assist in this regard.
Finally, in this briefing we summarise the remaining items from the PBR of interest to the investment funds sector and take stock of what has been a year of significant changes in the UK taxation of the industry.
Bank Payroll Tax
Bank Payroll Tax will affect bonus payments (other than existing contractual payments where the employer has no discretion as to the amount of the award) made by taxable companies to “banking employees” (broadly UK resident employees carrying on a “banking employment”).
Remuneration in excess of £25,000 and paid or arising between 9 December 2009 and 5 April 2010, including cash and other benefits which would normally be taxable, are caught by the new draft provisions. Such payments by a taxable company will therefore be subject to the new, one-off, 50% tax charge. The tax will be due for payment on 31 August 2010 and HMRC have stated that further details relating to interest and penalties in the event of non-payment will be announced in due course.
Bank Payroll Tax will not be taken into account when computing the bank’s profits or losses for corporation tax purposes.
What is a taxable company – “banks”
Companies that will be caught by the new tax include UK banks or foreign banks acting in the UK through permanent establishments (“relevant foreign banks”). In either case the definition of “bank” as used in the draft legislation covers those companies who are authorised for the purposes of the Financial Services and Markets Act 2000 (FSMA) and who, in the course of a trade, carry out activities which consist wholly or mainly of certain specified activities regulated for FSMA purposes (see box “relevant regulated activities” below) or carry out to any degree the activity of accepting deposits. The definition does not include certain specified entities, such as insurance companies, OEICs and investment trusts.
“Relevant regulated activities” (with Financial Services and Markets Act 2000 (Regulated Activities) Order reference):
- accepting deposits (article 5);
- dealing in investments as principal (article 14)
- dealing in investments as agent (article 21)
- arranging deals in investments (article 25)
- safeguarding and administering investments (article 40)
- regulated mortgage contracts (article 61)
It is important to note that the exclusions in the Regulated Activities Order, which would operate to carve out certain forms of these activities from the scope of the legislation (and therefore from the scope of the proposed tax), are not available to MiFID investment firms or credit institutions (see article 4(4) of the order).
The key FSMA regulated activities not included in the definition of relevant regulated activities are advising on investments and investment management. Accordingly, if a company’s activities consist wholly or mainly of investment advice or management it should not be regarded as a “bank” and therefore should not be required to apply the Bank Payroll Tax.
However, a non-bank company may still be caught by the proposed new rules if part of a group which includes a bank. Investment management companies in banking groups will therefore have to consider their position carefully.
What is a taxable company – LLPs
An LLP is not a company for the purposes of the draft legislation. Where employees are seconded to an LLP that carries out relevant regulated activities, however, then Bank Payroll Tax will apply.
What is a taxable company – banking groups
The definition of a taxable company also includes non-bank companies who are members of what are referred to as “banking groups”. The definition of such groups has understandably caused some concern in the investment funds sector.
A banking group as defined in the draft legislation is any group (meaning the parent company and all its 75% subsidiaries) headed by:
- a UK bank, or relevant foreign bank (in either case carrying out relevant regulated activities as described above)
- a non-UK company that, whilst not a bank itself, carries out activities in the course of a trade wholly or mainly of the type defined as “relevant regulated activities” or which carries out to any degree the activity of accepting deposits, and where the group includes a bank
- a non-UK company that is a member of a partnership, where the partnership carries out activities in the course of a trade wholly or mainly of the type defined as “relevant regulated activities” or which carries out to any degree the activity of accepting deposits, and where the group includes a bank
- a company which is the holding company of another company which would itself otherwise satisfy any of the conditions described above Where such a banking group exists, then the following companies (together referred to in this briefing as “affected non-bank companies”) must, under the draft legislation, apply the Bank Payroll Tax:
- a UK company whose business consists wholly or mainly in the making of investments (a “UK resident investment company”)
- a UK company authorised under FSMA, or a UK company which carries on a trade consisting wholly or partly of dealing in securities (a “UK resident financial trading company”)
- a foreign company with a UK permanent establishment which deals in securities (a “relevant foreign financial trading company”)
Accordingly a key question for affected non-bank companies will be to determine whether they are part of a banking group. This will depend on whether (i) the principal company in the group carries on relevant regulated activities, and (ii) whether the group includes a bank, which in any given case will depend on the facts at hand. We have asked HMRC whether they will offer advance binding clearances on this issue and what (if any) penalties will be imposed if the taxpayer company wrongly determines that the group of which it is a member does not carry out these activities. As at the date of writing, HMRC have not responded.
Considering each relevant regulated activity briefly in turn and in very broad summary:
- Accepting deposits if the money received as deposit is lent to others, or if another activity of the deposit-taker is materially financed out of capital from, or interest on, the deposits.
- Dealing in investments as principal broadly involves the buying, selling, subscribing for or underwriting of securities (shares, debentures, warrants, units, etc.) or contractually based investments (options, futures, CFDs) on one’s own account.
- Dealing in investments as agent involves the buying, selling, subscribing for or underwriting of securities and relevant investments (contractually based investments, pure protection contracts and general insurance contracts) on behalf of others as agent.
- Arranging deals in investments could also be described as making arrangements for another person to deal (to buy, sell, subscribe for or underwrite an investment), or for a person participating in the arrangements to deal in investments. There must be some active participation beyond simply recommending an investor to a broker.
- Safeguarding and administering investments covers both the activity of safeguarding and administering investments (securities or contractually based investments) to another person and providing a service under which a person undertakes to arrange on a continuing basis for others actually to carry out the safeguarding and administering.
- Entering into or administering regulated mortgage contracts which involves the provision of credit where the borrower’s obligation to repay is secured by a first legal mortgage on land in the UK and at least 40% of that land is used, or is intended to be used, as or in connection with a dwelling by the borrower or by a related person. As noted above the definition of “relevant regulated activities” in the draft legislation does not include advising on investments or managing investments. It is expected, and hoped, that such activities have not been included in the definition so as not to bring companies undertaking investment management or advice business within the scope of Bank Payroll Tax.
Which employees are caught?
Bank Payroll Tax will apply to “relevant banking employees” of taxable companies. The employee must be either UK resident or engaged in UK activities. Also the employee’s duties must be wholly or mainly concerned with relevant regulated activities or other activities which consist of the lending of money. This should provide further comfort to companies in the investment advice and investment management sector.
We hope that HMRC will clarify certain aspects of the proposed Bank Payroll Tax in the coming weeks. In particular the technical note which accompanied the draft legislation raises the possibility of further draft clauses to cater for bonus payments made by partnerships rather than partner taxable companies.
Interested parties are also encouraged to make representations to HMRC and we would be happy to advise clients in this regard.
Other PBR points
HMRC confirmed that an additional, higher rate of income tax of 50% will apply from 6 April 2011 to those with income in excess of £150,000. See our earlier briefing here.
All rates of national insurance contributions (NICs) will increase by 0.5% in April 2011, in addition to the 0.5% increase announced at the 2008 Pre-Budget Report. The rate of employee, employer and self-employed NICs will therefore be 12%, 13.8% and 9% respectively from April 2011. The additional rate of employee and self-employed NICs for earnings above the upper earnings threshold will also increase 0.5% to 2% from April 2011.
The standard rate of VAT will, as expected, increase to 17.5% on 1 January 2010. It was announced that there will be no further increase in the rate of VAT for at least a year.
Finally, HMRC again confirmed in the PBR its commitment to improving the UK’s competitive position in the asset management sector. Our previous briefings (available here and here) show that it has been a busy year for the industry. In particular, we have witnessed:
- the reform of the UK offshore fund rules, effective from 1 December 2009
- the introduction of a new, optional ‘streaming’ regime for UK authorised investment funds (AIFs), effective from 1 September 2009
- new ‘streaming’ rules for UK investment trust companies, also effective from 1 September 2009
- the introduction of new ‘white lists’ for AIFs and certain offshore funds, and
- changes to the taxation of dividends received by UK investors
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