Stephen Woodhouse
+44 20 7007 6621

Key Features
The key features of the Bank Payroll Tax (BPT) include:

• The tax is levied on banks rather than the employees receiving bonuses. The payment of the BPT will not attract corporation tax relief.
• It applies to payments made to employees of UK resident banks or building societies, members of a banking group or UK branches of overseas banks or companies within a banking group. There is a concern that the detailed coverage of the legislation might extend further.
• People who are regarded as employees include people resident or working in the UK and for a bank or building society whose duties relate to regulated activities or the lending of money.
• The BPT applies to discretionary payments in excess of £25,000 payable from 9th December to 5th April 2010 or contractual payments within those dates under commitments entered into on or after 9th December.
• BPT also applies to intermediaries of either the Bank or the employee or to personal services provided by an individual and as such extends beyond employees.
• There are further detailed anti-avoidance provisions. These include rules to ensure that the BPT applies to loans made during the period of the BPT where one of the purposes of the loan is the reduction or elimination of BPT or any other tax or national insurance contributions.
• Where a loan is subject to the legislation, the amount charged to BPT will be the amount of the loan rather than the normal interest equivalent amount charged on loans from employment. It appears likely that this will apply to most loans from an employee benefit trust.
• The rules also apply to arrangements for the making of future payments (or provision of money's worth or other benefits or any reward equating in substance to remuneration).
• Where arrangements are made for future payments (such as post 5th April 2010), BPT will apply by reference to the date when the arrangements are made on the amount which it is reasonably assumed will be paid or benefit which it is reasonable to assume will be provided.
• There are limited exclusions for share benefits delivered through HMRC approved plans but the legislation will apply to other forms of long term equity awards.
• The tax will be payable on 31 August 2010.

Impact of the BPT
The Chancellor stated that he did not wish to impose a windfall tax on the Banks but rather to give them a choice between building their capital or paying bonuses but being subject to the newly announced levy. This is stated to be for the period to 5th April 2010 only but with the provision to extend it for further periods.

The BPT will have a substantial effect on the payments of bonuses within Banks in the current tax year. It also appears to apply disproportionately to deferred bonus amounts paid in accordance with the principles supported by the FSA and related reports. For instance, a deferred bonus awarded in the current tax year in the form of deferred equity payable over three years could give rise to the PBT on the full projected value of that bonus whereas three series of annual payments should only be subject to the value of the award for the current year (subject to any possible extension of the tax to later years).

Where bonuses are paid which fall within the new rules, the total tax cost (ignoring any potential corporate tax relief) would be 103.8% of the amount of the bonus received (in excess of £25,000).

This will represent a substantial cost for Banks operating in the UK. It can be expected that where bonus awards have not been made for the current year, such awards are likely to be deferred until future years (but with care being required to avoid there being any arrangements for future payments) and that this will extend to longer term awards such as restricted stock or other equity benefits.

In the longer term, this may increase pressure for banking operations to be located outside the UK or for other steps to be taken to mitigate the impact of the new rules.