December 23, 2009Extra national insurance burden ahead

One of the significant announcements in the Pre-Budget Report earlier this month is a further increase in national insurance contributions (NIC) which is to take effect from 6 April 2011.

The NIC rates and limits are broadly frozen for 2010/11 at the 2009/10 figures, with a couple of minor exceptions.

An increase in the rates of NIC is proposed from April 2011 with an extra 1% being added to the rates applicable to employers, employees and the self-employed. The main rate of Class 1 (employee) NIC will be 12% and the Class 4 rate will be 9%. The employer rate will increase to 13.8%.

The additional rate of Class 1 and 4 contributions, payable on pay and profits currently in excess of £43,875, will also increase from the current 1% to 2%.

The government has announced that it will protect those at the lower end of the earnings scale by an increase in the point at which contributions become payable. It is therefore expected that employees paying the standard employee rate and earning below £20,000 will pay less NIC overall as a result of the change.

The government had previously announced that NIC rates would increase by 0.5% from April 2011. This further increase of 0.5% will represent a significant increase in costs particularly for employers.

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December 22, 2009Spurs manager faces tax charges

Spurs manager Harry Redknapp is "extremely surprised and is disappointed" that the taxman is beginning criminal proceedings against him for tax evasion, in the New Year.

In a statement on Tottenham Hotspur's website issued by his solicitors BCL Burton Copeland, it said HM Revenue & Customs’ decision will "in due course, be shown to have been totally misconceived".

It said the club said it gave Redknapp its full support, and his position was unaffected.

"The club considers this matter to be a private, tax issue which pre-dates Harry’s employment with the club and which is not related to football matters."

The charge is understood to relate to unpaid tax on an offshore payment made by former Portsmouth chairman Milan Mandaric to Redknapp when he was manager.

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December 9, 2009How bankers are dodging to save their bonuses from windfall tax

Bankers across the City are trying to change the terms of their pay deals to avoid Alistair Darling’s threatened bonus tax on their earnings.

Financiers are in frantic talks with their employers, having moved swiftly over the past few days to try to avoid punitive taxes on their bonuses.

The City is scared that Mr Darling will use today’s Pre-Budget Report to announce such a one-off levy. And high earners have rushed to make contingency plans with their employers, lawyers and accountants. Schemes to reduce a heavy tax bill include:

1. increasing a banker’s basic salary in return for reducing the bonus element of their pay;
2. beefing up benefits, which could include paying school fees;
3. reclassifying a banker as a "consultant" thereby making him or her a self-employed businessman and escaping a banker tax;
4. reclassifying a banker as being based in another country - quickly;
5. splitting off trading desks and turning them into mini hedge funds so that those involved are no longer bankers but hedge fund managers.

It is believed that one Asian bank operating in the City has already implemented a plan where new bankers have been allocated at least two years’ worth of bonuses in the past few weeks, so they effectively squeeze under the wire of anything Mr Darling announces today.

One source said: "This is why a bonus tax is such a daft idea. Regardless of morality, such a tax would be totally ineffective because bankers will find endless ways of avoiding it."

He added that bankers are already anticipating that something will happen. "There is no reason why - so long as there is agreement between the employee and employer - a remuneration arrangement can’t be amended overnight."

The moves came as Bob Diamond, the president of Barclays, was asked whether Britain should impose a tax to deter banks from paying higher compensation. He said that he felt that imposing a tax on bankers’ bonuses would not be in line with the principles for compensation set out by leading G20 countries last year. "We don’t feel that is supported by the principles that were adopted," he said.

The Treasury is considering a windfall tax on bonuses in the City as part of the Pre-Budget Report set to be delivered today.

Alistair Darling, the Chancellor, said this week that banks would have to change their pay cultures to avoid encouraging the risky behaviour that helped trigger the credit crisis.

Experts at the "magic circle" law firms and "big four" accountants, which charge up to £600 an hour for advice on complicated schemes for avoiding tax, will pore over the proposals today after receiving a flurry of inquiries from anxious financial institutions ahead of the report.

Several partners at City law firms said the Government could face legal challenges if it goes ahead with the move. Lawyers said that such a selective tax would be extremely difficult to apply and is likely to create numerous loopholes. Graham Muir, a partner at Nabarro, said: "Banks will be instructing their advisers to try to find a way around it."

A number of lawyers and accountants doubt that the tax will ever be implemented. Bill Dodwell, head of tax policy at Deloitte, the accountancy firm, said that the Government will struggle to push it through Parliament before the next election.

In addition to a number of avoidance schemes, the windfall tax is likely to give rise to numerous court challenges. The financial crisis has already led to several cases in which bankers have sued, claiming they were denied bonuses to which they were entitled.

Commerzbank is facing lawsuits from two groups of traders who are claiming €50 million (£45 million) in withheld payments.

Officials are hoping that if they launch the tax on bankers there will be too little time for employers in the US and elsewhere to repatriate staff or take other measures to avoid it.

But Stephen Cahill, a partner at Deloitte, said: "Banks could look at capital gains ideas as the Government’s proposal may be an income tax. They could also look at deferring more of the bonus so that it is taxed in future years."

The Treasury is confident that it would not have to get new tax legislation written on to the statute book before the Christmas bonus round but simply announce the plan to make it live and legally binding.

While banks are preparing to earmark the size of bonus pots for 2009, they will be paid out over the first few months of next year. It is unclear whether a tax would be aimed at institutions with banking licences.

The Government is certain to include any foreign banks with operations in the UK but may not target hedge funds and brokers as they would probably not be bailed out by the taxpayer if they failed.

Alternatively, a wider net of all individuals regulated by the Financial Services Authority could be drawn.

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