UK Bank Payroll Tax

December 23, 2009


As part of the UK 2009 Pre-Budget Report which was delivered on 9 December 2009, the UK Chancellor of the Exchequer announced a new, one-off "bank payroll tax" ("BPT") on certain discretionary bonus payments paid by "banks" (as defined) between 9 December 2009 and 6 April 2010. The proposed levy is 50% of the total bonus amount in excess of £25,000 paid. Broadly speaking, the BPT only applies to relevant amounts awarded between 9 December 2009 and 6 April 2010. Amounts which had already been awarded before or which are awarded after the relevant period are therefore generally outside the scope of this tax, and companies which are due to award bonuses after the relevant period on the basis of an established precedent are, currently in the clear, but any deliberate delay of bonuses until after 5 April 2010 is likely to fall foul of anti-avoidance legislation and give rise to a payment of tax. Equally, the Government has reserved the right to extend the relevant period if pay practices do not conform with its expectations and/or pay restraint measures still to be announced in the Financial Services Bill have not yet taken effect.
Following the publication of the draft legislation which accompanied the announcement, there was considerable uncertainty as to the scope of the BPT as the definition of "bank" as drafted in the draft legislation was much broader than had been expected.

Further to representations from various interested parties in relation to the potentially wide definition of "bank", HM Revenue & Customs ("HMRC") published an update to clarify the intended scope of the proposed BPT on 18 December 2009.

In summary, HMRC confirmed in the update that the BPT is aimed at retail and investment banks and to banking groups, and is not intended to apply to non-banking institutions outside of banking groups. In particular, HMRC has confirmed that insurance companies, asset managers and stockbrokers, for example, will not be considered to be within the scope of the BPT.

More specifically, the update states that the definition of a "bank" will be limited to (i) deposit takers and (ii) so-called "Full Scope BIPRU 730k Investment Firms", either of whose activities consist wholly or mainly of the following activities (the "Regulated Activities"):

* Accepting deposits;
* Dealing in investments as principal;
* Dealing in investments as agent;
* Arranging deals in investments;
* Safeguarding and administering investments on behalf of clients; and
* Regulated mortgage contracts.

A Full Scope BIPRU 730k Investment Firm is one which has both a base capital requirement of €730k and is neither a Limited Licence Firm, nor a Limited Activity Firm, as defined for UK regulatory purposes.

A specific exclusion has been given to prime brokers who are Full Scope BIPRU 730k Investment Firms.

While some questions have been addressed by the publication of this update, there remains a number of unresolved matters, particularly in relation to the application of the measures to certain Full Scope BIPRU 730k Investment Firms not specifically excluded by provisions in the guidance, but who could arguably be described as non banking companies. HMRC has confirmed that they are working with representative bodies and individual groups on outstanding issues. We will keep you updated on any further developments.

Kind regards
Jan Birtwell and Janice Seah

IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing or recommending to another party any matters addressed herein.