Banks expected to swallow most of new UK bonus tax

December 11, 2009

By Steve Slater

LONDON, Dec 11 (Reuters) – Banks are likely to swallow the bulk of the cost of a shock UK tax on bonuses unveiled this week, rather than pass it on to staff or find loopholes, as more countries join the clampdown on payouts, industry experts and sources said.

Britain slapped a special 50 percent tax on bank bonuses on Wednesday, provoking outrage across the industry and raising fears that London will lose talented staff and business to rival financial centres.

But France looks set to follow with its own one-off tax and Germany and other countries may clamp down on the free-wheeling bonus culture that critics say fueled the financial crisis. If more follow, it could reduce the impact on London and also prompt banks to absorb most of the cost, experts said.

“The mood over the last 24 hours seems to be that most banks will swallow the pill,” said Neal Todd, corporate tax partner at law firm Berwin Leighton Paisner.

Banks are still assessing the impact of the tax, notably its scope in terms of whether it will stretch to asset management, private equity and other activities, and how far it applies to staff who spend just some of their time in Britain.

“Our feeling is the banks will take it on the chin, realise it’s punitive and a one-off and if they try to wiggle out of it then next time around the government will be even harsher,” said Benjamin Williamson, economist at the Centre for Economics and Business Research (CEBR).

The government estimates it will raise about 550 million pounds ($896 million) from the tax, reflecting an assumption that it will force banks to rethink bonuses and overall compensation structures.

Barclays had already planned to bump up fixed salaries for its investment bankers, people familiar with the matter said, and rivals have done the same. That trend and other shifts could accelerate.

The levy applies to all bonuses over 25,000 pounds for UK employees until April 5. The government said it can extend the period to deter banks from deferring pay, however, and tax experts said there is scope to change rules if loopholes appear.

London’s bonus pool was estimated to rise to 6 billion pounds for 2009, the CEBR estimated in October, up 50 percent from last year but well down from the record 10.2 billion pound paid out for 2007.

Guaranteed bonuses could account for about 1 billion of the pool and much will fall under the threshold set, but the amount raised could be far higher than the Treasury’s estimate, Williamson said.

Banks typically finalise payout plans late in December or early in January. They are working through how many staff it will affect and what the cost would be, bank insiders said.

“The difficulty for the banks is the timing, which illustrates what a populist measure it is,” Berwin Leighton’s Todd said. “It’s come out of the blue, so people have very little time to plan around it and have to deal with their highly mobile staff today.”

A one-off tax will anger many, but probably not prompt an exodus, experts said. More damaging is the uncertainty about future tax policy and the threat it could be repeated, mindful that income tax was first introduced in Britain as a temporary measure in 1798 to pay for a war with France.

“On its own this would probably not be enough to push many people offshore because it’s a one-off measure. But it’s on top of a series of other unhelpful measures, all of which creates a climate where high earning people in the City feel they are being penalised,” Todd said.

U.S. bank Goldman Sachs said on Thursday that bonuses for its top managers will be paid in stock, rather than cash, but bankers said they do not expect lawmakers in the United States, Switzerland or Asia to impose one-off taxes, which could see them attract talented staff.

(Additional reporting by Victoria Howley; editing by Simon Jessop)

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