City HR functions can expect to be inundated by queries from bankers anxious to change their employment status to avoid the chancellor’s one-off tax on bonuses, experts have predicted.
The move is expected to encourage banks to seek ways of avoiding the tax, such as reclassifying bankers as consultants, making them self-employed so they can escape the new measure; reclassifying bankers as being based in another country; or splitting up trading desks and turning them into mini hedge funds so that employees receiving bonuses would be classed as hedge fund managers, not bankers.
Guy Lamb, employment partner at law firm DLA Piper, told Personnel Today: “It is very likely – in fact I would say definite – that bankers will change their contracts. In the financial services community, bonuses are an ingrained part of the culture, and anything to change that will be resisted.”
Following Darling’s announcement today, Lamb added City HR functions will start to receive calls from bankers asking how they can avoid the tax, but he warned that until full details of the legislation had been published, HR should not offer specific assurances.
“The concern is that the government has given itself wide-reaching power to look at avoidance schemes, meaning moves like bumping up salaries or giving bonuses via share schemes will be caught,” he said.
With the new tax being applied to discretionary rather than contractual bonuses, Fiona Bolton, employment partner at law firm Eversheds, added the new policy could cause confusion for HR functions as the line between the different bonuses was not always clear.
She said: “It is not always straightforward to establish whether or not a bonus is contractual or discretionary, and there is often a fine distinction. Who will make the decision as to whether or not a bonus is ‘discretionary’ for these purposes?” she said.
A number of experts have also warned that the windfall tax will lead to an exodus of talent from the banking sector.
Richard Lambert, CBI director-general, said: “A headline-grabbing tax on bankers’ bonuses may have populist appeal, but the government needs to take care not to put the UK’s financial services sector at a comparative disadvantage internationally. The threat of an exodus of talent is real.”
More than 1,000 investment bankers are already thought to have left the state-owned RBS to join rival banks where they can earn guaranteed cash bonuses and larger salary increases.
Ben Wilkins, director in international mobility at professional services firm PricewaterhouseCoopers, added: “Making it more expensive for employers to pay bonuses to financial services sector employees, even as a one-off arrangement, puts the UK at a disadvantage compared with international competitors, some of whom are using consistently lower tax rates to actively attract highly paid and internationally-mobile employees.”