UK 'Super Tax' Fails To Curb Bonus Culture

by Robert Lee, Tax-News.com, London

12 January 2010

The UK government's 'super tax' on bank bonuses looks likely to fail in its intention as banking groups prepare to announce huge profits and bonus pools over the coming weeks, although there could be one crumb of comfort for the Treasury in the form of substantially higher revenues from the tax than had initially been estimated.

Reports over the weekend suggested that about USD65bn will be paid out in bonuses globally to top banking staff over the coming weeks, with US bank JP Morgan to kick off a string of earnings announcements this Friday.

But while the 50% bonus payroll tax was designed to dissuade banking operations based in the City of London from using new profits to reward executives, traders and other senior banking professionals, and to instead use the money to recapitalize, a survey by the Financial Times has suggested that banks will simply absorb the cost of the tax by effectively doubling the level of bonuses or increasing salary levels.

According to the FT poll of 12 banks, US institutions based in London are the most likely to absorb the the cost of the bonus tax, although European banking institutions seem more likely to only partially offset the tax, with shareholders likely to shoulder much of the burden as dividend payouts are reduced.

The one-off 50% tax applies to bonuses of more than GBP25,000, and was announced by Chancellor Alistair Darling in the pre-budget report last month. It will apply to retail and investment banks, including building societies, and to banking groups.

While a politically-popular move, the tax is riddled with potential flaws, and banks were always expected to easily sidestep it.

Indeed, the banking industry could also mount a legal challenge against the tax, arguing that it is discriminatory and in breach of European legislation. For example, while a derivatives trader employed by a bank would be hit by the measure, someone else doing the same job for a hedge fund would escape the tax.

The government is expected to fend off such attacks, and with estimated revenues from the tax now having jumped from a relatively paltry GBP500m to GBP5 to GBP6bn, it is very unlikely to bow to pressure from the banking industry and overturn the measure.

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