The TUC has published a new report this morning called Bonus Season. The summary says:
Ending corporation tax relief for pay and bonuses worth more than 10 times average annual earnings (£26,200) could raise around £1.7bn a year if applied to the banking and financial services sector, according to a new TUC report published today (Monday).
The TUC report Bonus Season uses data from the Labour Force Survey to show that over a third (36 per cent) of employees earning more than £250,000 a year in the UK work in banking and finance.
The report then uses HMRC data to estimate that around 81,000 people have incomes of over £262,000 (10 times average annual earnings) that come primarily from employment, including 29,000 people in banking and finance.
The report finds that total pay on earnings above £262,000 in the finance sector - which the TUC believes should be disallowed as a deductible expense for corporation tax purposes - is around £6.8bn a year.
Ending corporation tax relief on earnings over £262,000 in the banking and finance sector would raise £1.7bn a year - vital revenues towards paying back the deficit created by the financial crash, says the TUC.
The report also estimates that extending the scrapping of corporation tax relief for top pay and bonuses over 10 times average earnings to all UK companies would raise around £5bn a year.
With the government effectively cancelling out its own levy on bank balance sheets by cutting the rate of corporation tax from 28 per cent to 23 per cent by 2014, the banking and finance sector is no longer making a proper contribution towards paying off the deficit it played a key role in creating, says the TUC.
A previous TUC report The Corporate Tax Gap showed that banks already pay well below the headline rate of corporation tax and that that the scale of bank losses at the height of the crash has allowed them to knock £19bn off their future tax bills, despite an £850bn bailout from taxpayers and the Bank of England.
The fact that banks are back recording big profits and handing out billions of pounds in bonuses proves they can easily afford a new tax on big bonuses, says the TUC.
The TUC believes that making earnings more than 10 times average annual earnings liable for corporation tax would not only raise revenue but also tackle growing pay inequality by encouraging companies to spread pay across the workforce, rather concentrating it on those at the very top.
As well as calling for top pay to be liable for corporation tax, the TUC believes the following changes would help tackle the growing pay divide between top executives and the rest of the workforce:
- Bring a much-needed dose of economic reality to executive pay decisions by introducing worker representation on to remuneration committees.
- Make executive pay more transparent by publishing the ratio between top pay and both median company workforce pay and the lowest paid members of staff.
- Tackle the closed shop of non-executive directorships (NEDs) by forcing companies to advertise positions externally.
- Make rates of pay increase for directors reflect those of other employees, with an explanation given in the remuneration report should this not be the case.
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It’s disingenuous to say that a normal trading expense such as salaries receives a subsidy simply because they attract tax relief. An organisation’s turnover is dependent in large part on its people. Take away the people and you have no turnover. It’s like saying tax paid is a subsidy for the government from a private company – and equally silly.
Since other expenses are disallowed for social purposes so might salaries be so if excessive
This is completely consistent with decades of tax policy
Nice try, but you yet again completely fail to take into account the fact that the vast majority of bonuses in London are paid by foreign institutions. It is one of the few things that we have learnt that from the analysis of the previous government’s bonus tax. Over 50% of bonuses are paid by US bulge bracket firms, and another 25%-30% by major European and some Japanese investment banks.
These non-UK institutions pay no or little UK taxes. This is because (i) the European banks trade here as branches under EU passport rules, and are therefore taxed in their countries of incorporations, (ii) the US investment banks highly tax-optimized and in particular are allowed to re-charge considerable amounts of inter-company head-office costs.
In truth your proposal would only affect a handful of British banks, none of which are large payers of bonuses in London (even in the case of Barclays, most bonuses are actually paid in the US). In short, it would totally fall short of your predicted level of revenues.
They are UK tax resident
Of course they pay UK tax
And they’ll pay more if salaries are disallowed
So as usual you are completely wrong
And within a few years, all those foreign banks will have moved large parts of their operations outside of the UK. If it is estimated to raise £5bn, you are talking about a market value impact of £50bn, more than enough to justfiy all those banks moving. And then you lose 63% of those salaries instead of gaining 23% of the excess over £262,000.
Oh dear. The old ‘we’ll all leave’ argument
You know they never do.
Why do you bother saying it?
“They are UK tax resident
Of course they pay UK tax”
But their UK branches are generally not profitable (or corporation tax paying), largely because of salary costs and the abiolity of foreign banks to book a lot of their income outside the UK even if a lot of the income producing assets are created with the involvement of staff operating in the London markets.
Getting the income tax, NI etc from UK resident workers is about all the Treasury can expect to make from most foreign banks, but that is a substantial amount.
Then we need to challenge their transfer pricing, don’t we?
The branches of European institutions are most definitely NOT UK resident.
The subsidiaries of US investment banks are UK tax resident, but they pay de minimus amounts of local tax because of their ability to re-charge central costs (intellectual property, various services, etc. You are fooling yourself if you believe that the impact of your proposal on them will be anything other than very marginal.
And respectfuly, I disagree
What a great argument.
[…] providing good wages and jobs for people. How will you fund this I hear people say, well how about ending corporation tax relife on high-pay for a start? Surely it is only right that those on high wages subsidise decent wages […]
“Then we need to challenge their transfer pricing, don’t we?”
Wouldn’t really work. Much of the transfer of activity offshore occurs through bond sales and loan syndication. If Bank A syndicates a loan to say a Dutch company, then the syndication will take place in London, where Bank A earns its fees, but the assets will be sold to the Amsterdam branches of banks B to Z, where the interest income is earned.
Then when Bank B does the same for an Italian company, it earns its fees in London, but the syndicated loan is booked in the Rome branch of Bank A and Banks C to Z.
So the fee is understated
That’s transfer pricing
There is no transfer pricing involved here. All transactions are booked offshore, and so are the fees. US investment banks use typically onshore US vehicles, while European banks account for fees through their headquarters’ balance sheet. The London-based bankers are run as a cost center.
More generally Richard, you seem to contradict yourself here. Your initial reply was that the global banks would cough up more on the basis of your (the TUC’s) proposal alone. Now it seems that in order to generate these revenues, some further measures would be needed (transfer pricing and else). What is it?
Would it not be a good idea to have this type to things covered before releasing a report. As things stand you are just shooting down your own credibility.
Respectfully, an offshore banking is saying I’m shooting my credibility?
Are you kidding?