The bank payroll tax announced at PBR 2009

The bank payroll tax announced at PBR 2009 applies to retail and investment banks (including building societies), and to banking groups. It does not apply to non-banking companies outside of banking groups (for example, insurance companies, asset managers, stockbrokers etc.). Draft legislation setting out the scope of the new tax was published at PBR in an HMRC note that included a brief overview of the legislation and Explanatory Notes on the provision.

Since PBR we have received a number of representations concerning the definition of a ‘bank’ used in the draft legislation. In particular we have received representations that the definition of a bank inadvertently catches companies which would not be regarded as a bank from a commercial or legal perspective. Having considered these, we think that the diversity of regulated investment activities undertaken by non-banking financial service groups in the UK means that the original definition of a ‘bank’ did not effectively exclude all the groups we intended to exclude. This resulted in a number of corporate groups inadvertently being brought within the definition of a ‘banking group’, and therefore within the scope of the bank payroll tax.

To ensure that the definition of ‘bank’ and ‘banking group’ applies as originally intended we propose to amend the draft legislation in the following ways:

• Limiting the definitions of ‘UK resident bank’ and ‘relevant foreign bank’, so that, for a non-deposit taker, they only apply to a person which is a full scope BIPRU 730k firm investment firm (and whose activities consist wholly or mainly of relevant regulated activities).
• In this context a person which would be a full scope BIPRU 730K investment firm but for the fact that its head office is not in the United Kingdom is to be treated as being one.

In addition, adding the following to the list of ‘excluded companies’

• A company in a group that is not a deposit taker and is only carrying on relevant regulated activities on behalf of an insurance company in the same group.
• A company that does not carry on any relevant regulated activities otherwise than as a manager of a pension scheme.
• A company whose activities consist wholly or mainly in acting as the operator of a collective investment scheme (within the meaning of Part 17 of FISMA 2000).
• An exempt BIPRU commodities firm.

We will also be making changes

• to remove prime brokers who are full scope BIPRU 730K firms from the scope of the tax, and
• to exclude non-banking financial service groups that are incorrectly characterised by the rules as ‘banking groups’ simply because the group structure includes a company with banking activity, even though that is a minor activity within the group as a whole. Whilst the bank should be in scope the rest of the group should not.

We believe that these changes should address most of the representations made concerning the definition of banks and banking group. In addition we are working with representative bodies and individual groups to address further representations to clarify the scope and effect of the proposed legislation.

The background to this announcement is that the draft legislation sought to target banks (and banking groups) by defining a bank by reference to the FSA regulated activities most characteristic of banking. For a retail bank these include accepting deposits, and for an investment bank they include various activities related to dealing in investments. These regulated activities are not exclusive to banks. To help limit the scope of the new tax to just banks and banking groups other types of regulated activity, more characteristic of other types of financial service, were excluded from the definition.