Union urges chancellor to ignore 'scaremongering' as bankers say super-tax is job creation scheme for Paris and Zurich
A "politically motivated" super-tax on bankers' bonuses will drive star City players overseas, Alistair Darling was warned today after he pledged to "claw back" money from banks in return for £850bn of taxpayer support for the banking sector.
One lawyer said the one-off 50% tax on bonuses of more than £25,000 that will be paid by banks, rather than bankers, could become a job creation plan for Frankfurt, Paris and Zurich, to the detriment of the City of London.
The levy was welcomed by campaigners from the thinktank Compass, which had called for the tax. Tony Woodley, general secretary of the Unite union, urged the chancellor to "resist scaremongering from the City over 'brain drain', with unemployment set to rise, this is a time to put jobs and families first".
But after the City minister, Lord Myners, spent thisafternoon calling the heads of all major banks in the City to try to reassure them about the tax, which is being introduced immediately, bankers reckoned there would be a race to circumvent the rules by raising basic salaries, deferring bonus payments or shifting bankers' contracts overseas.
John Varley, chief executive of Barclays, warned of an exodus of talent. "The maintenance of a level playing field in financial services regulation and taxation is the best way of achieving [a vibrant financial sector]," he said.
"Getting that balance right is vitally important to supporting London's position as a leading financial centre and the UK's position in the global banking industry."
The claim by Darling that the tax – which will last four months until the end of the current tax year – will raise £550m in revenue from 20,000 bankers caused some confusion amid estimates that the City is amassing a £6bn bonus pool for this year.
This would suggest a tax revenue of closer to £3bn – but the Treasury has factored in a move by banks to cut their bonus payouts. The government is also unable to impose the super-tax on bankers with guaranteed bonuses or contractual rights to a share of the profits they generate.
Bankers who have, until now, supported the government's bailout of their sector were feeling that they were being targeted unfairly after a year of hard work. The stockmarket reacted calmly with the FTSE 100 ending 19 points lower at 5203 although some bank shares, particularly Barclays, were harder hit amid concerns about it how it would be affected by the bonus tax.
But the cost of insuring British government debt spiked amid lingering concerns that the debt burden caused by the bailout could affect Britain's debt rating.
Darling said tax avoidance measures would be introduced immediately and HM Revenue & Customs made it clear that "it will not be possible to avoid bank payroll tax by the use of loans which are in substance earnings, or by channelling a bonus through an employee benefit trust or similar intermediary vehicle".
But John Whiting, tax policy director of the Chartered Institute of Taxation, said banks may find ways around the tax. "We need to see the detail but the obvious thought people will have is that it may be possible to sidestep the measure by waiting a year," he said. Treasury officials said any evidence banks were trying to avoid the rules would encourage authorities to impose the tax for another year.
Big banks have already started raising salaries in the face of G20 rules on bonuses. Barclays Capital, the investment banking arm of Barclays, is the latest to promise its bankers a 150% pay rise after rises at rivals such as Swiss bank UBS, and more pay rises at other banks are rumoured.
The short-term nature of the tax was a relief to some lawyers. Nigel May, tax principal at MacIntyre Hudson said: "The only saving grace is the tax's limited duration … If this is a budget for jobs, it is for jobs in Frankfurt, Paris or Zurich."
Michael Wistow, head of tax at City law firm Berwin Leighton Paisner, described the tax as "politically motivated" and was concerned about the consequences. "Three years ago the idea of leaving the UK didn't enter the conversation when talking to clients – why would it – but now it will feature in pretty much every conversation.
"They won't all go but it's a constant topic now," he said.
The cost of paying bonuses will also rise - and bonuses of £1m or more will generate more in tax than will be paid out to employees. Rupert Shiers, partner at McGrigors, said: "Allowing for employer's national insurance contributions and PAYE, this means that even at headline rates it will cost a bank £182,000 to pay a bonus worth just £59,000 to the employee. The clear message is that HMRC and the Treasury feel that the banking sector has gone beyond the pale."
Copyright Speakers Corner 2017