The UK Government’s Pre-Budget Report, issued on 9 December 2009, contained two significant measures relevant to UK fund managers. The possible application of the bank payroll tax (or “bankers’ bonuses” tax) to UK fund managers is somewhat unclear. Preliminary indications are that the tax will not apply to employees of UK fund managers (even if employed in the asset management groups of banks), but this is not yet entirely certain. Urgent clarification as to the intended scope of the tax has been sought from HM Treasury and HM Revenue & Customs. But the general 0.5% increase in the rates of National Insurance Contributions (“NIC”) is a more straightforward measure, which will have a direct impact upon UK fund managers like most other UK taxpayers.
Bank Payroll Tax
The bank payroll tax is a “one-off” tax which will be charged at 50% on bonuses over £25,000 paid to “relevant banking employees” employed by “taxable companies” on or before 5 April 2010 (although this end-date may be extended). The tax will be payable by the employing taxable company, but will not be tax-deductible for that company.
A “taxable company” is a company whose business consists “wholly or mainly” of certain “relevant regulated activities”. These include: (a) dealing in investments as principal; (b) dealing in investments as agent; and (c) arranging deals in investments. “Relevant banking employees” are UK resident employees of the taxable company whose duties are “wholly or mainly concerned (whether directly or indirectly) with these regulated activities (or with activities which consist of the lending of money)”. The “directly or indirectly” part of the definition may extend the scope of the tax to employees engaged in support, operations and management who do not directly carry on the relevant regulated activities.
This proposed scope of the bank payroll tax should mean that many UK fund managers (particularly hedge fund and private equity fund managers) are not caught by the tax. First, amounts paid to LLP members in the form of “bonus” profit allocations will not be within the scope of the tax—LLP members are self-employed and are not employees. Secondly, an LLP is not a company for these purposes and so (as currently drafted) bonuses paid to employees of an LLP will not be caught by the tax. However, where an LLP has a corporate member which employs staff to work in the LLP business, and both the LLP and the employees concerned were wholly or mainly engaged in relevant regulated activities, the bank payroll tax could apply to bonuses paid to those employees of the corporate member. It is possible that the scope of the tax could also be extended to apply to direct employees of the LLP.
Where these potential exceptions from the tax are not available, the issue for UK fund managers is whether they (and their employees) are “wholly or mainly” engaged in relevant regulated activities. The issue here is that “dealing in investments as agent” and “arranging deals in investments” are activities which are commonly included in the scope of a UK fund manager’s FSA permissions, although their activities might better be regarded as falling within the scope of the other permissions which managers will obtain, such as “managing investments”, “establishing and operating collective investment schemes” and “advising on investments”. On this basis, the better view seems to be that UK fund managers (and their employees) are not “wholly or mainly” engaged in “relevant regulated activities” specified for the purposes of the test, but in other non-specified regulated activities. But this is a question of fact and degree, and it is possible that the particular activities of certain UK fund managers might be such that they could be regarded as within the scope of the tax.
Urgent clarification has been sought from HM Treasury and HM Revenue & Customs on the application of the “wholly or mainly” test to UK fund managers, and early indications are that the bank payroll tax was intended to apply to UK banks (which received, directly or indirectly, UK taxpayer support during the financial crisis) and not to UK fund managers. But it is clear that the current uncertainty and difficulty in interpretation of the draft legislation is unsatisfactory and that further guidance or amendment to the draft legislation is urgently required to clarify its exact scope.
National Insurance Contributions
The Government had already announced that all of the main rates of NIC would increase by 0.5% with effect from 6 April 2011. In the Pre-Budget Report, the Government announced a further 0.5% increase in rates, so that all the main rates of NIC will increase by 1% from their current rates on 6 April 2011. Both Class 1 employees’ NICs and Class 4 NICs (paid by the self-employed, including LLP members) will increase from 1% to 2% (an initial amount of earnings—currently £43,875—is taxed at higher rates). Class 1 employers’ NICs (paid by employers by reference to the full amount of their employees’ compensation) will increase from 12.8% to 13.8%.
These increases will clearly represent an increased cost of doing business for UK fund managers. The increase in the rate of employers’ NIC to 13.8% will also accentuate the existing benefits, in appropriate cases, of having key individuals engaged in the management business treated as members of an LLP, rather than employees of an LLP or limited company, so that the increased 13.8% employers’ NIC charge is not payable in respect of their fixed or bonus compensation.