A draft version of a letter 11 independent UK stockbrokers are set to send to the HMRC:
Dear Sirs
Arden Partners plc, Oriel Securities Limited, The Evolution Group plc, Numis Corporation plc, Altium Capital Limited, Cenkos Securities plc, Collins Stewart plc, Panmure Gordon & Co. plc, Shore Capital Group plc, Canaccord Adams Limited (UK), Astaire Group plc
We write to seek clarification of the scope of Bank Payroll Tax [BPT} as set out in the Technical Note of 9 December 2009. All of the above firms appear to be within the ambit of the new rules although we understand from page 5 of the Note that it was not intended that they be affected. The uncertainty is damaging now and will escalate if left unclear.
Our business
All of the above named institutions represented in this letter are UK headquartered independent small and mid-cap stockbroking houses, broker-dealers [and investment banks].
The services provided to clients include:
• Institutional and corporate brokerage;
• Corporate finance support (including M&A advisory, public bids, IPOs, secondary fundraisings etc); and
• Research and analysis.Our client base is primarily UK listed corporations. In this role we introduce important competition into the UK market to counterbalance the larger investment banks and bank owned stock brokerage organisations, which may have numerous conflicts in respect of a particular deal.
None of the above named institutions has permission to take deposits, nor are we capital intensive lending organisations.
This group all carry net cash on their balance sheets as a regulatory capital buffer. Their business model is diametrically opposed to those of banks and building societies. They run their businesses responsibly, knowing that they will not have tax bailouts or government support if they get into trouble. Some are listed, some are private, but all have employees amongst their shareholder base, some having a very high proportion of employee ownership. They are people businesses, not capital intensive lending organisations.
How are we caught?
The definition of “UK resident Bank” in paragraph 19(1) of the draft payroll tax legislation is widely drafted such that any company which is an authorised person for the purposes of FISMA 2000 has the potential to be a “taxable company” for the purposes of these rules where the activities of that company consist wholly or mainly of relevant regulated activities as defined in para 20(1)(a).
The list of regulated activities in para 20(1)(a) includes (inter-alia) activity regulated by:
- article 14 (dealing in investments as principal)
- article 21 (dealing in investments as agent); and
- article 25 (arranging deals in investments),some or all of which may apply to the institutions listed above, despite the fact that none takes deposits or enters into lending activity.
Possible amendment to the definitions
You will note the reference to investment banking in the description of our business at the start of this letter. This is an understood generic term in the City and the manner of our business does not require a banking licence as such.
A key feature of the investment banks that we suspect these proposals are aimed at (which the press have called “casino banks”) is that a significant part of their business derives from Article 14 activities, dealing as principal.
The signatories to this letter may also undertake some activities regulated under articles 14 and 21, dealing as agent, although not to the extent that they “wholly or mainly” constitute the activities of the enterprise. The degree to which such activities are undertaken is the key differentiator between the signatories and what would classically be considered an “investment bank”.
The signatories to this letter derive their income mainly from
• annual fees from advice, so called corporate broking, regulated under Article 53, and not included in the para 20 BPT list
• charging firms for raising funds, regulated under Article 25, arranging deals, which is in the para 20 list, and
• pure equity research and investment advice and M&A advice for which there is an exemption in Article 70 of FISMA 2000 (RA) Order 2001 and so is not in the para 20 BPT list.From year to year the mix will change. In 2008 fund raising was very tight so income was mostly Article 53 advice and this problem would not have arisen. In 2009, fundraising, Article 25 arranging, has come back.
It is therefore Article 25 activity that is giving the definitional problem here for the signatories to this letter, and we suggest that, as this activity is essentially risk free, the solution to this group’s problem is either to omit it or to stipulate that it must be combined with a wholly or mainly activity of an Article 14 nature, dealing as principal.
We also note the similarities and differences between the signatories to this letter and the pure “corporate finance houses” which focus entirely on corporate broking (Article 53) and M&A advisory activities (exempt under Article 70). Both types of institution (signatories to this letter and the pure corporate finance houses) have a fee based business with a similar risk profile. Neither type of institution would expect to benefit from taxpayer assistance in the event of financial difficulties. The difference is that a key part of the business of the signatories is to assist with fund raising. It is not clear why this differentiator should make the difference between being within or without the scope of BPT.
The urgent need to get this resolved
All of these firms are at or around their year end. BPT has caused huge uncertainty for these companies, their investors and crucially employees as they approach their year ends. The uncertainty being caused by the draft legislation is unsettling and likely, if not clarified quickly, to damage these firms as employees move to parts of the financial sector not within the draft scope of BPT. Overseas competitors not caught are at a competitive advantage to UK based firms and taken as a whole the proposals are likely to cause huge damage to these independent UK regulated businesses, which play an important role within the City.
The policy behind these changes
We interpret the relevant policy from the Chancellor’s speech on 9 December:
“I am determined that any tax increases will continue to be guided by our values of fairness and responsibility. Mr Speaker, the banks last year made collective losses of £80bn in this country alone. This would have been much higher without the unprecedented level of support from the taxpayer. There is no bank which has not benefited, either directly or indirectly, from this help. This should be a time for banks to rebuild their capital base and become stronger.
A tax on profits, as has been suggested, will prevent them from doing this. So I have decided against a windfall tax.
However, there are some banks who still believe their priority is to pay substantial bonuses to their already high-paid staff. Their priority should be to rebuild their financial strength and increase their lending.
So I am giving them a choice. They can use their profits to build up their capital base. But if they insist on paying substantial rewards, I am determined to claw money back for the taxpayer.”
PN01, page 5 published on 9 December 2009 also says “The government attaches great importance to tackling the remuneration practices that contributed to excessive risk taking by the banking industry. “
Summarising
BPT aims to encourage the use of profits to strengthen the capital base of banks so that lending can be grown – this does not apply to the businesses listed above.
Alternatively BPT recovers for the tax payer some of the funds from which banks have benefited directly through financial support – the businesses listed above have received no such support and are very unlikely ever to do so, as no single failure would ever lead to systemic risk to the UK’s economy.
Excessive risk taking is simply not a feature of the business models and reward systems within which the above businesses operate.
We therefore hope that the government will move swiftly to end this period of uncertainty, if not by revised draft legislation, then at least by ministerial assurances to the group of taxpayers represented in this letter.
Yours faithfully:
Related links:
Bonus backlash – FT Alphaville
Backlash over banker supertax grows – FT
Lex: Bankers’ bonus tax – FT
Lombard: City’s self-interest uncurbed – FT