By Andrew MacAskill and Gavin Finch
Dec. 10 (Bloomberg) -- British Chancellor of the Exchequer Alistair Darling’s plan to levy a 50 percent tax on bonuses will make banks choose between punishing shareholders or employees.
Darling yesterday imposed the tax, to be paid by all banks operating in the U.K., on bonuses they pay employees until April 5. The measure, which the Treasury says will raise more than 550 million pounds ($890 million), will affect about 20,000 people.
Banks will have to decide whether to maintain payments to employees, allowing the additional tax expense to boost the cost of compensation and reduce profits for shareholders, or to protect profits by slashing bonuses. In some cases, firms may have to pay out bonuses because the terms have already been agreed with staff, said Jo Keddie, an employment lawyer at London-based Dawsons LLP.
“It’s a poison pill,” Keddie said in a telephone interview. “Either shareholders are going to take home less, or banks are going to have to punish their employees who have done very well,” she said. “It’s potentially shareholders that are going to lose out because many of the bonuses have already been agreed.”
Goldman Sachs Group Inc., the most profitable securities firm in Wall Street history, and U.K. banks including Barclays Plc and Royal Bank of Scotland Group Plc are most affected by the levy because they have the largest bonus pools, said Shaun Springer, chief executive officer of Square Mile Services Ltd., which advises London financial firms on pay.
‘Most to Lose’
Goldman Sachs, based in New York, set aside $16.7 billion to pay employees in the first nine months of the year. RBS’s directors are seeking to increase the amount the Edinburgh-based lender allocates for bonuses by at least 50 percent to 1.5 billion pounds, the Sunday Times reported Dec. 5, without saying where it got the information.
“Goldman has the most to lose,” said Springer. “Banks that employ the most U.K. citizens will be next in line.”
Barclays Capital, Barclays’s securities unit, employs about 20,000 people, and RBS employs about the same amount at its investment-banking division worldwide. Officials at Goldman Sachs, Barclays and RBS declined to comment.
International securities firms such as Goldman Sachs and JPMorgan Chase & Co. both base their European headquarters in the square mile, as London’s principal financial district is known. Goldman Sachs International Ltd., one of the firm’s more than 25 U.K. divisions, employed 5,831 people and allocated a total of 81 million pounds in gross wages and salaries in the year through November 2008, according to filings at the Cardiff, Wales-based registrar Companies House.
‘Bankers’ Folly’
U.K. financial firms were preparing to set aside as much as 6 billion pounds in bonuses for 2009, 50 percent more than 2008, according to an October report by the Centre for Economics & Business Research Ltd., a London-based research firm.
Rising bonus payments sparked anger among politicians and labor unions after the government provided more than 1 trillion pounds to prop up lenders including Royal Bank of Scotland during the credit crisis.
“It’s just not on to make nurses, social workers, dinner ladies, cleaners and hospital porters pay the price for the folly of the bankers,” said Dave Prentis, general secretary of Unison, the U.K.’s largest public employees’ union. “The people who earn most should pay the most.”
The U.K. will force banks awarding discretionary bonuses of more than 25,000 pounds to pay the one-time levy. Employees will still have to pay income tax on bonuses, the Treasury said. The top tax rate on earnings of more than 150,000 pounds will rise to 50 percent in April, a measure announced earlier this year. The bonus measure may be extended beyond April if the Treasury finds banks are deferring payments.
Thatcher, Blair
“On a bonus of 1 million pounds, the new tax will be 500,000 pounds, National Insurance will be 130,000 pounds, and personal income tax is 400,000 pounds,” said Chris Maddock, tax director of Vantis Group Ltd. “This makes a total of 1.03 million pounds for the Treasury.”
Bankers aren’t the first to be subject to an industry- specific tax. In 1981, the Conservative Party under Margaret Thatcher imposed a 2.5 percent levy on bank deposits, saying that rising interest rates were generating unearned profit. Almost two decades later, Tony Blair later put a windfall levy on utility companies.
Package Differently
“It’s something that the banks are probably going to have to pay up on this year and hope it doesn’t happen again,” said Daniel Naftalin, a partner at Mishcon de Reya in London. “This isn’t really a tax on individual bankers, so the government is a lot less open to legal challenges than it could have been.”
Taxes on bankers pay may extend beyond the next general election even if the Conservative Party who are leading in the polls take power, said Mark Wickham-Jones, professor of politics at the University of Bristol.
“One of the by products of the banking crisis is that it has marginalized bankers and turned them into a sort of bogey man,” he said. “The Conservative Party may continue with similar measures arguing the taxes are functional. They will just package the rhetoric differently.”
To contact the reporters on this story: Andrew MacAskill in London at amacaskill@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net.
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