December 8, 2009 2:00 am

Bank fury at UK bonus tax plan

The British banking industry rounded angrily yesterday on reports that the government plans to introduce a windfall tax on bonuses, describing the proposals as a punitive measure that would trigger an exodus of financial services companies from London.

Alistair Darling, chancellor of the exchequer, is expected to include a form of "supertax" on bankers' bonuses in his pre-Budget report tomorrow, as the Labour government attempts to set out clear dividing lines with the opposition Conservatives ahead of a general election next year.

While details of any such scheme remain thin, Mr Darling is said to be keen to send a warning signal to banks that are intending to distribute hefty awards to staff in the aftermath of the global financial crisis, when they were propped up by billions in taxpayers' funds.

Angela Knight, the chief executive of the British Bankers' Association (BBA), accused the UK government of playing politics with the City of London's future, saying it would send a message that London was no longer a competitive place for the financial services industry.

"It's good politics, yes, but it doesn't make any sense," Ms Knight told the Financial Times. "We need to think not just about the individuals but about the business that will be done elsewhere."

The windfall proposals have exacerbated the growing acrimony between the government and the UK banking industry, which has already been forced to sign on to a series of far-reaching reforms on remuneration that are designed to better link risk with reward.

Tax experts said that introducing a further tax specifically on bonuses could pose serious practical problems.

Questions included how to ensure any such tax did not breach anti-discrimination rules and how to define a bonus so it could not be side-stepped by, for example, a temporary move to a higher-paid job.

Mike Warbuton, a partner at Grant Thornton, said the idea of singling out a specific group of individuals was "completely alien" to UK tax laws. "If they go ahead with this, it will become a perfect example of the law of unintended consequences," Mr Warbuton said. "It's an absolute nonsense."

However, some experts were less dismissive, saying there were legal avenues for a bonus-specific tax.

Chris Sanger of Ernst and Young, professional services company, said it might be possible to present the levy as a one-off tax that would not be reintroduced by describing it as a tax on a windfall created by cheap finance.

Whether banks would then be able to devise schemes to get around the tax by increasing salary or deferring bonuses for another year raised additional complexity, he said.

John Whiting, policy director at the Chartered Institute of Taxation, said bonuses in the UK are already taxed, with about 70 per cent ending up in Treasury coffers once income tax, national insurance contributions and value-added tax on the goods and services bought with the awards were taken into account.

"I think people have lost sight of this in some of the discussion," said Mr Whiting.

Editorial Comment, Page 10 Lex, Page 14 Blog: Darling's options, www.ft.com/westminster

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