December 11, 2009
In his presentation of Pre-Budget Report — Securing the Recovery: Growth & Opportunity (PBR), released on Wednesday, the UK’s Chancellor of the Exchequer, Alistair Darling, unveiled a one-off "bank payroll tax" of 50 per cent on bank bonus payments which takes effect immediately and runs (unless extended!) until 5 April 2010.
In the 216 page report, HM Treasury proudly notes that the UK has been at the forefront of international financial regulatory reform through its Presidency of the G20. Indeed, in the week immediately following the G20 meeting in Pittsburgh, the UK government rushed out a statement in its bid to become the first member nation to implement the bonus restrictions agreed at the summit, by announcing the agreement of the main banks incorporated in the UK to implement these restrictions. This however does not appear to be enough for the Chancellor and its bid to stay ahead of the game in maintaining its tough line on remuneration reform, the "bonus tax", which had been much trailed in the press prior to 9 December, has been pushed forward by the UK government, to the widely reported infuriation of many bankers. In the immediate aftermath of the announcement, the news has been filled with scare-mongering predictions of a "City brain drain" and "talent blockages" as bankers rush out of London to friendlier global financial centers.
With an expectation of raising a modest £550 million (US$895m) as a result of what many see as domestic political pandering (achieving even opposition party support), at a cost of driving away excellence and driving down property prices, is the UK really staying ahead of the game or is it taking itself out of the game?
Who does it affect? Banks, building societies and financial businesses and holding companies within banking and building society groups, each operating in Britain, whether UK based or not
What is the tax levied on? Discretionary bonuses awarded to such employees during the period 9 December 2009 to 5 April 2010 (inclusive) in excess of £25,000 (US$40,710) comprising money, money’s worth, benefits and loans
Who pays the tax? Affected banks and building societies must pay an additional bank payroll tax of 50% on the amount of the bonus which exceeds £25,000
(1) Fixed or contractually guaranteed bonuses which are not performance linked
(2) Bonuses payable to employees who are not UK domiciled
(3) Bonuses awarded after 5 April 2010 provided they are not promised to bankers over the next four months. HM Treasury has already issued a warning shot over the bows for awards made on 6 April 2010!
Reason for the tax: Darling has presented the tax has a tough response to public anger over bankers’ remuneration, the government’s belief that the bank bonus culture of ‘rewards for failure’ were a significant contributor to the financial crisis and more specifically, the tax is a quid-pro-quo for the government financial support given during this period and is a claw-back for the tax payer
Impact (official): The tax is expected to affect about 20,000 bankers and raise approximately £550 million
Impact … unintended consequences? (1) With exultation in other financial centers such as New York and Frankfurt that the UK is sending out a message that it is not "bank(er) friendly", it is not surprising that bankers are already lobbying their HR departments to move out of London. (2) Investors and real estate agents in the UK are convinced that this "supertax" on bonuses will push back hopes of recovery in the UK housing market where the market for homes priced in the £3m-£10m (US$4.9m – US$16.3m) range is partly driven by cash bonuses. (3) Whilst some bankers are quietly pleased and are happy to sit on their hands for four months, many others are of the view that the low threshold of £25,000 will have a disproportionate impact on bankers who by no means fall within the category of the super-rich such as senior back-office staff and junior bankers. (4) The trend which had started in the summer to higher fixed/base salaries will continue — ironic really, as this was exactly what remuneration reform was meant to curb!
Gibson, Dunn & Crutcher lawyers are available to assist in addressing any questions you may have about these developments. Please contact the Gibson Dunn attorney with whom you work, or Selina Sagayam (+44 20 7071 4263, [email protected]) in the firm’s London office.
© 2009 Gibson, Dunn & Crutcher LLP
Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.