Responding to representations made since the Pre-Budget Report on 9 December, HMRC announced on Friday that the draft legislation released on 9 December and in particular the definition of a ‘bank’ did not actually reflect their intentions and that the legislation will be substantially amended in this regard.
The proposed changes
Previously the application of the Bank Payroll Tax was not just to banks but to many other financial institutions as well, including family offices, UK investment managers of hedge funds, private equity funds and brokers.
The amended rules will restrict the application of the tax to deposit taking banks and non-deposit takers who come within the definition of a “full scope BIPRU 730K investment firm”. A full scope BIPRU 730K investment firm is one governed by the FSA’s Prudential sourcebook for Banks, Building Societies and Investment Firms and subject to the highest level of base capital resources requirement. This is a welcome change that will provide certainty for firms previously unclear as to the application of the tax. While it should exempt many smaller fund managers, family offices and brokers from the scope of the tax, some managers may still be within the definition. This somewhat aligns the Bank Payroll Tax with the FSA’s draft code on remuneration practices issued earlier this year, which covers the top 48 UK financial institutions in the UK, although the definition used by HMRC still seems to be wider this.
The definition of excluded companies in the draft legislation will be widened to include companies only carrying on relevant regulated activities on behalf of an insurance company in the same group, companies that do not carry on any relevant regulated activities otherwise than as managers of pension schemes, companies whose activities consist wholly or mainly in acting as the operator of a collective investment scheme, and certain commodities firms. Also excluded will be prime brokers and groups with minor banking operations.
No revised legislation has been released and HMRC have confirmed that they are still working to clarify the application of the Bank Payroll Tax, so more annoucements can be expected in the future.
Much uncertainty still remains as to the application of the Bank Payroll Tax, particularly as to how long it will operate for. Despite speculation since the PBR, the announcement on Friday did not include any extension to the period for which it applies beyond 6 April 2010.
Questions also remain as to whether the Government will in fact be able to introduce the Bank Payroll Tax before the General Election. The provisions relating to such taxes would usually be included with the Finance Bill, which is not usually published until after the Budget in March. With speculation surrounding an election date of 25 March, there would be no legislative time to enact the tax and while the other parties have indicated that they will not vote against the Bank Payroll Tax, whether a new Government would actually introduce it is another question, particularly the Conservatives, who have announced their own plans to restrict the ability of banks to carry forward losses and deduct interest payments to increase the amount of tax paid.