Darling's 'Politically Motivated' Bonus Tax Attacked
Dec. 9 (Bloomberg) -- Chancellor of the Exchequer AlistairDarling said the U.K. will force banks awarding discretionarybonuses of more than 25,000 pounds ($40,800) to pay a one-timelevy of 50 percent.
The tax, effective today, will be paid by all banks thatoperate in the U.K., including U.S. firms such as Goldman SachsGroup Inc. and JPMorgan Chase & Co. Employees will still have topay income tax on their bonuses, the Treasury said. The top taxrate on earnings of more than 150,000 pounds will rise to 50percent in April, a measure announced earlier this year.
Today’s levy will raise about 550 million pounds, less than1 percent of the U.K.’s total tax revenue, according to KPMG LLP.Darling, whose Labour Party faces an election by June, is tryingto mollify voter anger after providing more than 1 trillionpounds to prop up lenders including Royal Bank of Scotland GroupPlc in the credit crisis. Barclays Plc President Robert Diamondsaid yesterday the measure risks driving business away from theCity of London.
“This will further damage the image of the City as aglobal financial centre,” said Shaun Springer, chief executiveofficer of Square Mile Services Ltd., which advises Londonfinancial firms on pay. “This is politically motivated.”
The government introduced the measure after firms that hadbenefited from taxpayer bailouts began to allocate more money toemployee remuneration. Bonuses for U.K. financial servicesemployees may rise by 50 percent to 6 billion pounds this year,the Centre for Economics & Business Research Ltd. said in Oct.
‘Giving Them a Choice’
“There is no bank that has not benefited either directlyor indirectly from this help,” said Darling, who ruled out atax on banks’ profits. “I’m giving them a choice. They can usetheir profits to build up their capital base, but if they insiston paying substantial rewards, I’m determined to claw money backfor the taxpayer.”
The levy is effective until April, when the 50 percentincome tax rate will start. The measure may be extended beyondthat date if the Treasury finds banks are deferring payments.
About 20,000 bankers will be affected, according toTreasury estimates. The levy will apply to discretionary bonuses,which account for “substantially all” bonuses, according toPatrick Steven, a tax partner at Ernst & Young in London. Themeasure is unlikely to apply to executives working at privateequity funds or insurers owned by banks, according to BillDodwell, head of tax policy at Deloitte LLP.
‘Righteous Anger’
It will now cost a bank 162,800 pounds to provide anemployee with a 59,000-pound bonus after tax, compared with112,800 pounds before, said Jill Storey, a partner at KPMG LLP.
“On a bonus of 1 million pounds, the new tax will be500,000 pounds, National Insurance will be 130,000 pounds, andpersonal income tax is 400,000 pounds,” said Chris Maddock, taxdirector of Vantis Group Ltd. “This makes a total of 1.03million pounds for the Treasury.”
Darling is “speaking to the righteous anger people arefeeling toward the people who wrecked the financial system,”said Ken Miller, the former vice chairman of Credit Suisse FirstBoston and now a private investor. “But this is better short-term politics than long-term economic policy,” he added. “Evenif it is unpopular, it is unlikely to ruin London as a worldfinancial center.”
Tax rates in Britain are still far below the levels of the1970s when Mick Jagger, together with the rest of the RollingStones, moved to France briefly to escape liabilities in the U.K.
Callaghan, Thatcher
When Labour was last in power, in the late 1970s underJames Callaghan, the top tax rate was 83 percent on earnedincome and 98 percent on unearned income. The rates were cut to60 percent and 75 percent when Margaret Thatcher took office in1979 as her Conservative government tried to revive the economy.By 1988, Thatcher had cut the top income tax rate to 40 percent.
Britain’s financial services industry generates about 61billion pounds of tax revenue, about 12 percent of the U.K.total, according to PricewaterhouseCoopers and the City ofLondon Corporation, the municipality for the U.K.’s mainfinancial center.
International securities firms such as Goldman Sachs andJPMorgan both base their European headquarters in the squaremile. Goldman Sachs International Ltd., one of Goldman’s more 25U.K. divisions, employed 5,831 people and allocated a total of81 million pounds in gross wages and salaries in the yearthrough November 2008, according to filings at the Cardiff,Wales-based registrar Companies House.
London ‘Less Attractive’
“London may well look to them now like a significantlyless attractive place to build a business,” said Angela Knight,chief executive officer of the British Bankers’ Association,which lobbies for 260 financial companies. “Only concertedinternational agreements will succeed in reforming remunerationin the financial sector.”
The U.S. House approved in March a 90 percent tax rate onbonuses at companies that received more than $5 billion ingovernment aid in response to disclosures of retention pay foremployees of American International Group Inc. The Senateretreated from a similar proposal after President Barack Obamasaid the U.S. shouldn’t “govern out of anger” and AIGemployees began returning their bonuses.
“You may find Obama coming on board now and saying ‘due towhat London is doing we are doing the same,’” said JasonKennedy, Chief Executive Officer of recruiter Kennedy Associatesin London. “People are pretty depressed today in the City. Atthis point there’s no way out.”
To contact the reporters on this story:Gavin Finch in London at gfinch@bloomberg.net;Scott Hamilton in London at shamilton8@bloomberg.net;
Last Updated: December 9, 2009 13:22 ESTSource: Bloomberg
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