Our recent Insight on the Pre-Budget Report on 9 December 2009 set out some of the main announcements made by the Chancellor of the Exchequer. Of these announcements, the Bank Payroll Tax (“BPT”) is one of the more controversial, not least due to its surprising scope and lack of clarity in relation to its application.
Some of the main issues arising from the BPT are set out below to assist you with determining your organisation’s position under the draft legislation. Given the complexity and confusion surrounding the BPT, we should be delighted to assist you with reviewing your contractual and other bonuses in order to determine whether you and they fall within the scope of the BPT.
1. Tax Rate and Chargeable Period
The Bank Payroll Tax is charged at 50%. It is payable by the company (and not the individual receiving the bonus) on amounts exceeding £25,000. As such, an award of £100,000 would result in the employer paying an additional £37,500 in tax (i.e. 50% of £75,000). This tax is in addition to the underlying PAYE and NIC liabilities (for both the employer and employee) arising on the bonus payment to employees.
It applies with immediate effect from the time of the Pre-Budget Report speech on 9 December 2009 and will remain in force until 5 April 2010 (the “Chargeable Period”). There has been talk of extending the tax for a further period.
2. Who is subject to the tax?
Whilst the BPT itself may not have come as a surprise, it is doubtful whether the scope of its application would have been anticipated. Although the tax is referred to as a bank payroll tax, companies which fall within its scope may not necessarily be banks.
A company will be subject to the BPT (a “Taxable Company”) if it is a UK resident bank or a foreign bank conducting trade in the UK through a permanent establishment. In either case, banks are defined to include companies engaging in certain regulated activities, which include accepting deposits, dealing in investments as principal or agent, arranging deals in investments, safeguarding and administering investments and activities related to regulated mortgage contracts (the “Relevant Regulated Activities”).
Companies may also fall within the scope of the BPT if they are members of a banking group or members of an LLP which is authorised by the Financial Services Authority (“FSA”) and carries out relevant regulated activities.
While certain companies (such as insurance companies and investment trusts) are explicitly excluded, the practical effect of the draft legislation is to bring within the scope of the BPT a significantly wider range of companies than would traditionally be considered to be “banks”. Companies will therefore need to analyse closely their activities and group memberships in order to determine whether the BPT will be applicable to them. It is advisable to seek specific tax and legal advice in making such determinations.
3. What remuneration is affected?
In an effort to forestall BPT avoidance, remuneration has been defined in such a way so as to include all earnings or benefits related to employment, whether paid in cash, shares or benefits in kind, with the exception of expressly excluded remuneration. Such express exceptions include any regular salary, wages or benefits and any remuneration which the employer is contractually obliged to pay (but only if the contractual obligation was in effect before the Pre-Budget Report speech, and only if it relates to fixed amounts which are not subject to discretion). It is unclear whether bonus awards made regularly and consistently by custom and practice (without an express contractual provision) will be subject to BPT. A case-by-case analysis will need to be conducted on this point. Awards made under approved share incentive plans and approved SAYE option schemes are also outside the scope of the BPT, and will therefore serve as an attractive alternative to cash or sharebased bonus awards.
Note that arrangements made during the Chargeable Period for awards of future bonuses or benefits to employees will also be subject to the BPT, if BPT would have been payable if the award were to have been paid during the Chargeable Period. Additionally, certain loans made to employees will also fall within the scope of the BPT. For example, if an arrangement were made during the Chargeable Period to contribute to an Employee Benefit Trust, that would seem to fall within the anti-avoidance mechanism, however, if the arrangement were made prior to the Chargeable Period, it would appear not to be affected by the anti-avoidance mechanism.
4. Relevant Employees and Multiple Employments
Employees will be relevant employees if they are employed in “Banking Employment” – i.e. involved in the conduct of the Relevant Regulated Activities, whether directly or indirectly. This would result in some support functions also being caught by the BPT provisions.
It is worth noting that, even if an individual is not employed by a Taxable Company, he or she may still be a relevant employee for the purposes of the BPT if the individual performs banking services (Relevant Regulated Activities) for a Taxable Company. This could include secondees or agency staff, and will limit the ability of employees to change their employment status in an effort to avoid the BPT.
Note that if an employee is engaged in multiple employments with a Taxable Company, or is a relevant banking employee for multiple Taxable Companies who are associated, the employers would be liable for BPT if the aggregate of their awards exceeds £25,000.
5. Anti-avoidance Measures and Reporting Requirements
Anti-avoidance measures have been included in the draft legislation. This means that any attempts to structure an award in such a way so as to avoid the BPT will result in the award being considered to fall within the scope of the BPT if it would have done so but for the stated structure.
The reporting requirements will also be of significant interest to employers. Taxable Companies granting bonuses which exceed the £25,000 threshold will need to report all such bonuses to HMRC, even if the company believes the bonuses fall outside the scope of the BPT. Companies must therefore tread very carefully when making awards, and be absolutely certain of their legal position before doing so.
6. Practical Issues and Effect
The draft legislation fails to define clearly the scope of application of the BPT, as well as the boundaries between relevant and excluded remuneration. Careful analysis will be required in order to determine whether a company falls within the scope of the BPT. Consideration will also need to be given to the grey areas arising in relation to relevant remuneration – in particular, it must be questioned whether bonuses given regularly by custom as opposed to an express written provision in a contract will be subject to the BPT. Given that Taxable Companies will be required to report all bonuses above £25,000, even if they do not consider the bonuses to fall within the scope of the BPT, there is little margin for error.
The take-home message from the draft legislation is to avoid making any hasty decisions. Be sure to review carefully and analyse all relevant employment contracts and any past bonus practices, and keep thorough records of the decision-making process and reasoning behind the award of any bonuses exceeding the threshold.