by Peter Barker
LONDON, Dec. 9 (Xinhua) -- The headline announcement in Wednesday's pre-budget report (PBR) by British Chancellor Alistair Darling was a one-off tax on bankers' bonuses of 50 percent.
There had been much pre-budget speculation about what the chancellor, the British finance minister, would do faced with the return of large bonuses for bankers.
The chancellor told the House of Commons in his PBR that he would levy a one-off tax of 50 percent on bonuses, in addition to already existing taxes. It was to take effect immediately.
"The choice facing the country is between securing recovery or wrecking it -- between investment to build a fair society where all prosper and a divided society that favors the wealthy few," he said.
He said the one-off tax would apply to banks operating in Britain and to their Britain-based employees. Bonuses of 25,000 pounds or more would be put into a pot for each bank and that pot would be taxed 50 percent. The remaining sum would then be proportioned out among the employees who were to receive a bonus. Those bonuses would in turn be liable to the usually income tax rate.
There is considerable voter anger that bankers are once again getting ready to reward themselves with bonuses worth thousands, and sometimes tens and hundreds of thousands of pounds, in bonuses.
Darling's Labor Party will face the electorate in a general election in May of next year. They are currently well behind the opposition Conservative Party.
Several banks -- most notably the Royal Bank of Scotland (RBS) and Lloyds Group -- were bailed out in 2008 and have received further state aid since. The well-known high street bank Northern Rock had to be bailed out by the Bank of England in September 2007,and wholly bought by the government to prevent its collapse in February 2008.
All this came in the wake of the global financial crisis, in which financial institutions around the world found themselves suddenly exposed to the reality that tens of billions of dollars of loans that they had taken on would never be paid back and had become toxic. It was a shock which hit the foundations of the financial system.
Governments felt they had to react to save the system, and, according to National Audit Office figures, the British government stumped up 117 billion pounds to rescue its most vulnerable performers.
To see those same performers gearing up to reward themselves with bonuses after a 2009 which saw many increase profits as the result of government transactions to raise the cash and extend the credit to pay for the financial system bailout, caused widespread public anger.
In the run-up to the PBR, the RBS, now 80 percent state-owned, and Lloyds Group, about 43 percent state owned, both said they wanted to reward their investment bankers with bonuses.
The RBS hit the news last week when its board of directors threatened that they would resign if they could not pay bonuses to their top-performing investment bankers. They argued that they had to pay the market rate to attract the best performers, and that with good performers they would be able to pay off their debt to the taxpayer quicker.
Lloyds Group, announced last Friday that it wanted to pay massive bonuses to about 200 executives, who are likely to get one-off payments of up to 80 percent of their salaries.
The bank said that it had negotiated the bonuses with shareholders earlier this year as it began its merger with the struggling HBOS. It also said that the British government had backed the bonus package. Lloyds Group stressed that payments would be in shares and would be made over the next three years.
Reaction to the new tax among bankers was one of shock.
Angela Knight, chief executive of the British Bankers' Association, warned that the tax would endanger the city's position as a global financial center: "Viewed from abroad, London may well look now like a significantly less attractive place to build a business. We must repeat that only concerted international agreements will succeed in reforming remuneration in the financial sector."
Sean Drury, international mobility partner, PricewaterhouseCoopers LLP said "In terms of the impact on the financial services sector, it's unlikely a one-off levy on bonus pools in isolation would cause employers or employees to decide to relocate outside of the UK. But, in combination with the incoming 50 percent income tax rate (already announced and set to take place on April 6, 2010), National Insurance Contributions increases, restrictions on pensions tax relief and changes to the taxation of foreign nationals, the tax on bonuses will contribute to the declining attractiveness of the UK as a business location. Other territories will be keen to entice these highly-paid, highly specialized and highly valued employees.
"High-earning mobile executives decide where to live and work based on three main factors -- personal wealth, the infrastructure available to practice their trade and their family's overall quality of life so, when the already-announced income tax rate changes hit pay packets in April next year, those at the upper end of the spectrum may start to vote with their feet and look more urgently at the impact of moving to other established and growing business hubs.
"The changes announced in this PBR and the previous budget impact the wealth creators that the UK relies on to compete on a global stage and gives further impetus to those making decisions about where to locate their businesses to question their connection to the UK.
"With a third of the FTSE 100 companies CEOs being foreign nationals, and their average cash remuneration being around 800,000 GB pounds, ignoring long-term incentive arrangements, the growing contrast with the more stable and benign tax regimes of other economic hubs will present the UK as an increasingly unfriendly place to earn money."
The new tax begins immediately and is set to end on April 5, 2010, giving rise to rumors that some banks may choose to delay bonuses in order to avoid the tax.
Other well-known banks, such as Goldman Sachs, which have made a great deal of profit in the past year as the government has sought to fund the financial system bailout, are believed to be keen to pay the tax in order that they can keep their top performers.
Other banks, such as Barclays, have increased base pay as a way of avoiding the tax.
Special Report: Global Financial Crisis
