Saturday, December 12, 2009

Bank Payroll Tax - designed to create a pre-election distraction?

Maybe it's just me. On the one hand there is plenty of evidence to suggest that the announcement of a bank payroll tax is a genuine attempt to penalise the payment of "bankers' bonuses."

So much so that the tax has been widely welcomed by the media, the public and by most commentators. The provisions include a targetted anti-avoidance rule that effectively denies banks the facility to find ways around the tax. And the tax will apply to UK resident banks, building societies and "financial trading companies" as well as to foreign banks and financial trading companies with a UK permanent establishment.

So far so good.

On the other hand there are a couple of ENORMOUS let outs in the Bank Payroll Tax. I can't call them loopholes as those tend to only become apparent after the event and are rarely an integral and clearly stated element of new legislation. Here however we have both draft legislation and a detailed technical note that explains the provisions contained therein.

1 - Why is the starting point for the tax so high?
It will only affect bonuses that exceed £25,000.
I understand that some lower paid bank employees may be entitled to performance related bonuses. However such employees are outside the definition of "relevant banking employees."

So I suspect that the starting point was set sufficiently high to enable some favoured "relevant banking employees" to secure their discretionary bonuses without any penalty.

2 - Why is the affected period so short?
The bank payroll tax only applies to bonus payments made in the period from 9 December to 5 April 2010. (Although the press statements accompanying the PBR indicate that the Government will consider extending the period of the charge so that the tax remains in place until the provisions of the Financial Services Bill dealing with remuneration policy come into force).

For the moment though only discretionary bonuses paid during a four month period are to be penalised. Those that are awarded after 5 April 2010 will be subject to the new top rate of 50% income tax but will escape the bank payroll tax itself.

I can appreciate that there could have been problems in framing a penalty that applied to bonuses paid before the date of the PBR.

There is also to be an exception where the bank has no discretion as to the amount of the bonus due to a contractual obligation in place at the time the Pre-Budget Report was delivered. Again I assume that there was a good reason for such an exclusion.

But why do we have a cut off period just 4 months away? I suspect that this proposal was drafted earlier in the year and that the Government held it back so as to present it as a key measure in the PBR. In the event this was itself postponed by a few weeks and the window for penalising bankers' bonuses has been accordingly reduced.

In his PBR speech the Chancellor estimated that the tax would raise a little over £500m. This infers a figure of around £1bn bonuses which is much below those in previous years when they were in excess of £5bn. The more generous explanation is that the measure is expected to have the desired effect of discouraging discretionary bonuses over the next few months.

And that I suspect is the real intention. Once the cut-off date has passed, bankers bonuses will once again hit the headlines next April and May just as the real pre-election campaigns begin. The Government will then take the opportunity to note that bankers traditionally vote Conservative - the hope being, I assume, that this will discourage swing voters from being seen to do the same as those 'bad bankers'.

Or maybe I'm being too cynical.

The alternative view is that the the bank payroll tax has simply been designed to create headlines rather that to collect much in the way of tax. The furore over what constitutes a "taxable company", as defined in the draft legislation, could also be the result of a deliberate ploy to distract us all from the two issues highlighted above.

Time will tell.

1 comment:

  1. Emperor's new clothes ?
    How and when will this legislation be enacted with an election looming? It will require new legislation, to which HM Loyal opposition will undoubtedly want to scrutinise-v e r y s l o w l y.