The mechanics of the new levy on bonuses (the bank payroll tax (BPT)) are well documented:

However, the draft legislation published with the PBR provided important further detail; for example, giving more information on the broad range of remuneration to which the BPT regime will apply, and the anti-avoidance measures aimed at undermining arrangements (such as deferral arrangements) intended to circumvent it.

Clarification of scope. One of the key points arising from the draft legislation was that the BPT could catch many companies that are not within banking groups, as the definition of "taxable company" was drafted by reference to a broad range of regulated activities and potentially included many other companies operating in the financial services sector.

Importantly, HM Revenue & Customs (HMRC) has since announced that the tax will be restricted in its scope, and should instead apply only to firms that are "full scope BIPRU 730k firms" (or would be if their head office was in the UK). This broadly captures firms that are subject to the highest base capital requirement for regulatory capital purposes and which are authorised to carry on the activities of both "dealing on own account" and "underwriting and/or placing financial instruments" (Rules 1.1.18-1.1.21, Prudential sourcebook for Banks, Building Societies and Investment Firms, Financial Services Authority Handbook).

This should mean that many financial services companies, such as those primarily engaged in asset management, are outside the scope of the BPT. However, potentially affected persons should review their precise regulatory status and any revised legislation carefully. One of the issues companies are facing is that, while HMRC’s desire to consult is welcomed, the delay in producing revised legislation is causing uncertainty.

Interestingly, although it was stated by the government at the time of the PBR that the BPT’s purpose was to encourage changes in behaviour and to prevent the payment of large bonuses, more recently it has been suggested that this will not happen to the extent envisaged and that, instead, many banks intend to absorb the new tax and continue to pay bonuses as before (Financial Times, 5 January 2010).

As expected, the final version of the voluntary code of practice on taxation for banks (the Code) was published with the PBR, following a period of consultation embarked on in June 2009 (see News brief “Banks’ tax code of practice: complying with the spirit, not just the letter, of the law”, www.practicallaw.com/5-386-6893). The Code is intended to encourage banks to comply with both the letter and the spirit of the law by requiring signatory banks to adopt three main requirements:

It is this last issue that creates most difficulties (efforts to support good governance and transparency are to be applauded), as discerning the intention of Parliament may be very difficult, particularly for innovative transactions.

Some of the changes to the Code announced in the PBR relate to this issue and are to be welcomed: there is now clarity that the correct test is whether the signatory bank "reasonably believes" the transaction to be contrary to the intention of Parliament; and there is no longer a requirement to initiate a dialogue with HMRC in circumstances where there is doubt (with a risk that HMRC is granted a quasi-judicial role in such circumstances). On the other hand, the suggestion in the PBR that the intention of Parliament may be discerned by adopting a “too good to be true” test does not really advance the argument.

One surprise headline in the PBR that will not be welcomed was the extra 0.5% increase in National Insurance contributions rates. When combined with the 0.5% increase announced in the 2008 PBR, this will now mean a 1% increase from 5 April 2011 (the rate is unchanged for 2010-2011).

Many of the other measures in the PBR had been announced previously, or relate to specific anti-avoidance issues, but there are a couple of other announcements that also merit attention:

Patent box. The proposed introduction of a "patent box", whereby income arising from patents will be subject to corporation tax at a reduced rate of 10%, is welcome. However, this is tempered a little by the apparent narrowness of the regime (it is not intended to apply to all intellectual property) and the delay in its introduction (it applies only to income arising from April 2013). This proposal is the subject of consultation.

Foreign branch profits. Preliminary discussions are to be undertaken on whether there should be a move to an exemption regime for the taxation of foreign branch profits, so that the UK tax treatment of foreign branch income may be aligned with the UK taxation of foreign dividends following the introduction of the new dividend regime from 1 July 2009. This potential move would seem overdue and would be welcome.

It will be interesting to watch how the legislation on these issues develops, particularly in the context of a forthcoming election, where it is possible that there may be two Budgets in the relative short term.