UK Banks Face 50% Bonus Tax

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Alistair Darling, the UK Chancellor of the Exchequer, announced today that banks either had to use their profits to rebuild capital, or face a 50% tax on bonuses of more than GBP25,000. The Wall Street Journal reports:

Alistair Darling, delivering his pre-Budget report speech this afternoon, said: “This should be a time for banks to be rebuilding their capital bases. They have a choice: use profits to build up the capital base, or if they insist on using them to pay bonuses, I will ensure that we can claw that back through a one-off tax levy of 50% on individual bonuses over GBP25,000.”

He added that the government will ensure that anti-avoidance measures are in place to check the levy is collected. He estimated that the tax will raise up to GBP500 million.

(Exane BNP Paribas analysts) said in a research note this morning: “Given the leaked criteria, namely a one-off windfall tax on ‘excessive bonus pools,’ the highly profitable Barclays (BCS) would appear most at risk, with Standard Chartered (STAN.LN) and HSBC (HBC) also potentially exposed. It is somewhat ironic, in our view, that the U.K. Government, in adopting such measures, would be focusing its attack on those banks which adopted more prudent and cautious lending policies in the U.K. retail and commercial property markets.”

Banks such as Royal Bank of Scotland Group PLC (RBS), which now counts the government as its majority shareholder, could be less exposed in relative terms, they added in the note entitled ‘Assault on more prudent and profitable banks’, because of “lower bonus expectations”.

The analysts also said that the bonus tax could dissuade overseas investors from doing business in the UK. The BBC’s Robert Peston writes that hundreds of banks will be affected:

The tax will hit British banks as well as overseas banks with subsidiaries or branches in London. It means that banks from Britain’s Barclays, through France’s BNP Paribas, to Goldman Sachs of the US will all be affected. It will cause a furore in the City, because no other country has announced such a super tax on bonuses.

The chancellor is in effect saying that much of banks’ profits in 2009 have been a windfall, or a gift from the state generated by the exceptional financial and economic measures taken by the Bank of England and the Treasury to resuscitate the economy and financial system.

The Treasury clearly believes it has constructed the tax in a way which creates little incentive for individual bankers to move abroad or move firms – since the tax would be paid by the bank not the banker.

And since the tax will last no longer than a year, it should not be sufficient to persuade the banks themselves to re-locate to Paris, Frankfurt or Geneva – which are still at a disadvantage to London in respect of skills and tech infrastructure.

Also, if banks decided not to pay bonuses for the one year the tax is in effect, or claim those bonuses as salary, the Treasury won’t get nearly the money it anticipates. Incidentally, there’s also an election next year, so this move could be more political than anything else.

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