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Compliance

Darling wins few friends in 2009 Pre-Budget Report

Posted on 18 Dec 2009

Chancellor Alistair Darling delivered his pre-budget report to the UK parliament last week.

In an attempt to rein in banks’ activities that led to the financial crisis, Darling revealed his plans to introduce a special one-off levy of 50% on any individual discretionary bonus above £25,000. As part of the report, the HMRC also published a consultation paper on tackling off-shore tax evasion which follows on from HMRC’s increasing scrutiny of overseas companies.

Most industry commentators agreed that Darling failed to appease the City and the Labour core voters which the Government depends on to win a fourth consecutive term in power.

Jerome Lussan, Director of Laven Legal Services said: “The City feels under continuous attack which is threatening its future competitiveness as a leading financial centre whereas there is little comfort for the markets that Government debt is being tackled seriously enough.”

“Putting the rhetoric to one side, given the current political climate within the UK and the EU generally, it would be surprising if many banks and overseas businesses are not beginning to think twice about basing or relocating their staff or operations outside of the UK. This would boost rival financial centres and lead to more problems for the Treasury in the long run in its efforts to raise tax revenue. We have already seen an increased interest in Switzerland and Luxembourg from our hedge fund client base.”

Laven Legal Services has summarised the main points of the pre-budget report in relation to the bank bonus tax and off-shore tax considerations below.

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Bank Bonus Tax

  • The Bank bonus tax has been perceived by practitioners as a political rather than a tax raising measure, with limited belief that it will change behaviour. It has been argued that it will further undermine the UK’s international standing as a pro-business jurisdiction.
  • This is a one-off 50% bank payroll tax payable by banks and building societies on bonuses of more than £25,000 payable to either UK resident employees or non-UK resident employees performing duties in the UK between 9 December 2009 and 5 April 2010.
  • Concerns have been raised on the definition of ‘bank’ in the legislation, as it could potentially include investment firms that have permissions for ‘dealing in investments as agent’ or ‘arranging deals in investments’. Several brokers have already contacted the HMRC to address this issue.
  • The tax has been designed to catch cash, benefits, loans and many share-related awards which are not paid regularly and are dependent on performance.
  • 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.
  • Paying into an employee benefit trust and creating sub-trusts could be one possible approach to avoid the tax however general opinion is that the HMRC has reiterated that the new legislation will likely catch payments made to trustees even if the trustees do not irrevocably allocate the payments to individual employees.
  • To avoid the tax, employee share plans may remain the most popular option, which can provide reward in a tax efficient way but at the same time can be designed to meet the demands of the FSA and best practices.

Consultation on Tackling Off-Shore Tax Evasion

  • HMRC has published a consultation paper: ‘Modernising Powers, Deterrents and Safeguards: Tackling Off-shore Tax Evasion’. Comments are invited on the best way to implement increased sanctions on off-shore evasion and requirement to notify HMRC of the creation of certain new off-shore bank accounts.
  • The paper proposes introducing a more robust penalty regime for off-shore non-compliance and a compulsory notification regime to HMRC.
  • There are also proposed reforms to information requirements for non-resident trusts and other offshore financial structures.
  • The consultation period runs from 9 December 2009 to 3 March 2010. HMRC has also published an ‘Impact Assessment: Tackling Offshore Tax Evasion’ to be read alongside the consultation paper.
  • This consultation is the latest step in HMRC’s concerted attack on off-shore tax evasion and follows on from the 2007 Offshore Disclosure Facility (ODF), the New Disclosure Opportunity (NDO), the Liechtenstein Disclosure Facility (LDF) and HMRC’s new information and investigation powers for general compliance.

Laven Legal Services can help you with any concerns you may have with regards to on-shore and off-shore taxation, international structures and the set  up of asset management businesses.