Finance Bill Tracking Service 2010 | Budget 2010

BN02 BANK PAYROLL TAX

Who is likely to be affected?

1. Banks, certain financial businesses and holding companies in banking groups (defined in the legislation), building societies, certain financial businesses and holding companies in building society groups and UK branches of foreign banks ("a taxable company") that award relevant remuneration ("a bonus") exceeding £25,000 to a relevant banking employee directly or through an intermediary.

General description of the measure

2. Following the announcement in the 2009 Pre-Budget Report (PBR), legislation in Finance Bill 2010 will introduce a new tax, the bank payroll tax (BPT). It will be payable by a taxable company on bonuses if and to the extent that bonuses awarded by the taxable company exceed £25,000. The rate of BPT will be set at 50 per cent. A taxable company will also be liable to BPT where the bonus entitlement arises in respect of banking services performed for the taxable company regardless of who awards the bonus.

3. A Technical Note and draft clauses were published at the 2009 PBR. A number of changes have been made to the draft clauses. The main changes are:

•    clarification of the scope of the legislation in connection with when relevant remuneration is taken to be "awarded" during the chargeable period;

•    clarification of the scope of the legislation in connection with the definition of "taxable company";

•    introduction of a 60 day rule for relevant banking employees; and

•    inclusion of detailed machinery provisions for the assessment and the collection of BPT. These include provisions for penalties and interest.

Operative date

4. BPT will have effect from 12.30 pm on 9 December 2009 until 5 April 2010 for all discretionary and contractual bonus awards. There is an exception for contractual bonus entitlements where the payer has no discretion as to the amount of the bonus because of a contractual obligation existing at the time of the Chancellor's announcement.

Current law and proposed revisions

5. BPT applies to bonuses comprising money, money's worth, benefits and loans. Where the bonus includes money's worth or a benefit, the amount of remuneration for the purposes of BPT is the higher of market value or the cost of providing it.

6. A bonus is subject to BPT where it is awarded to a relevant employee, or where a contractual obligation to pay or provide the bonus arises, during the chargeable period (9 December 2009 to 5 April 2010 inclusive). For the purpose of the legislation, a contractual obligation arises only at the point at which a bonus is fixed, or capable of being fixed, without the exercise of discretion by any person.

7. For the purposes of BPT, a "relevant banking employee" is someone whose duties comprise of a banking employment and who is either resident in the UK in the tax year 2009-10 or performs his or her duties wholly or partly in the UK. A "banking employment" is one where the duties are wholly or mainly concerned, whether directly or indirectly, with certain activities regulated by the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 or activities which are not so regulated but which consist of the lending of money or of dealing in currency or commodities as principal.

8. Where an obligation to pay or provide remuneration at intervals arises within the chargeable period, and that remuneration is capable of becoming fixed without the exercise of discretion, any amount relating to performance or similar considerations only after the chargeable period will not be subject to BPT. This means that no performance related pay that relates only to periods after the chargeable period will be within the scope of the tax.

9. The legislation includes provisions that make clear that where the duties of the banking employment are performed by an employee who visited the UK for no more than 60 days in the 2009-10 tax year, that employee will not fall within the definition of a "relevant banking employee" and BPT will not apply to "relevant remuneration" awarded to that employee.

10. BPT applies to arrangements where an individual provides banking services through an intermediary or a bonus is provided through an intermediary. It is payable on or before 31 August 2010. BPT does not affect income tax or National Insurance liabilities of bank employees and is not taken into consideration when calculating the taxable company's profit or loss for corporation tax (CT) or income tax purposes.

11. The published legislation narrows the scope of the definition of a UK resident bank and a relevant foreign bank in a number of ways.

12. Companies (or in the case of company partners, partnerships in which they are partners) that do not carry out deposit-taking in the UK and which, in the course of their trade, carry on activities consisting wholly or mainly of one or more of the other activities regulated by the Financial Services Authority (FSA) as specified in the draft legislation ("relevant regulated activities") other than deposit-taking will only be within the definition of a UK resident bank or a relevant foreign bank where the firm:

•    is a BIPRU730k firm and a BIPRU full scope investment firm (within the relevant FSA definitions); and

•    has a capital resources requirement of at least £100 million in the period of account ending no later than the end of the chargeable period.

The legislation provides for the aggregation of capital resources in certain circumstances in respect of other firms within the group and in the case of certain partnerships.

13. Furthermore the list of companies specifically excluded from the definition of a UK resident bank and a relevant foreign bank has been expanded to ensure that the following firms are excluded:

•    firms that are Insurance Special Purpose Vehicles within the definition in section 431(2) of the Income and Corporation Taxes Act 1988;

•    firms that are Exempt BIPRU commodities firms (as defined in the FSA Handbook); and

•    firms that do not carry out relevant regulated activities otherwise than: o as a manager of a pension scheme;

•    on behalf of an insurance company in the same group; o in respect of asset management activities (which are one or more of being the operator of a collective investment scheme, being a discretionary investment manager wholly in respect of third party clients, or being an authorised corporate director (all these terms are defined in the FSA Handbook));

•    for the purposes of trading in commodities and commodity derivatives; and o for the purposes of trading in contracts for differences (CFDs) as principal with retail clients, or of trading in CFDs with another party to enable the firm or that other party to trade in CFDs with retail clients. Where an insignificant proportion of such CFDs are not with retail clients the exemption will still apply.

14. The definition of a "banking group" now excludes any group, where at least 90 per cent of the trading income in the last period of account of the group ending no later than 5 April 2010 is derived from insurance, asset management and related activities or non-financial activities (or a combination thereof). Any UK resident bank or relevant foreign bank within the group will still be a taxable company for the purposes of BPT.

15. The legislation includes provisions for the collection and management of BPT and will provide that all "taxable companies" will be required to submit a return by 31 August 2010. The provisions will enable HM Revenue & Customs (HMRC) to publish requirements as to the information to be contained in the return, the form in which it must be made, and how it must be delivered.

16. The intention is that a return must set out, amongst other things, that BPT is payable or confirmation that no BPT is payable. Penalties will apply to late filed or incorrect returns. The provisions will also set out that payment of BPT must be made by 31 August 2010. HMRC will have the power to publish requirements as to the method of payment. The intention is that payment will be made electronically using the Clearing House Automated Payment System (CHAPS). Interest and penalties will apply to late payments. Taxable companies will have the ability to amend their return and HMRC will have powers to enquire into a return and to issue determinations and assessments where a self assessment of BPT is not made or believed to be insufficient. These powers are broadly similar to those currently available in respect of CT.

Further advice

17. Banks that have a HMRC Customer Relationship Manager should contact them if they require information not covered by the published material.

18. Information about this measure is available on the HMRC website at http://www.hmrc.gov.uk/pbr2009/bank-payroll.htm

19. If you have any questions about this change, please email pbr2009.taxteam@hmrc.gsi.gov.uk or telephone 020 7147 0110. Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk