The tax on the payment of bonuses:
the Pre-Budget Report
In the Pre-Budget Report on 9 December 2009 the Government
announced that, in advance of the measures in the Financial Services
Bill concerning remuneration taking effect,
where bank (and building society) employees are awarded
discretionary bonuses, in whatever form, above £25,000 in
the period from the Pre-Budget Report to 5 April 2010, the banks
paying these bonuses will pay an additional bank payroll tax of
50 per cent on the excess bonus over £25,000.
In view of the overlap in the subject matter of this
part of the Pre-Budget Report and the Financial Services Bill,
and the fact that there has been much high profile discussion
in the media about whether the tax on bonuses is in breach of
the Human Rights Act, we have decided to look at this particular
aspect of the Pre-Budget Report in this report.
The Government's justification for the tax on bankers'
bonuses is explained in the Pre-Budget Report: it says that it
is to encourage banks to take full account of factors such as
a prudent approach to risk and the need to ensure a sound capital
base when making their decisions about bonuses.
The Government attaches great importance to tackling
the remuneration practices that contributed to excessive risk
taking by the banking industry. The Government has made clear
that the sector needs to develop sustainable long-term remuneration
policies that take better account of risk and facilitate the build
up of loss-absorbing capital. However, evidence suggests that
some may be intending to pay bonuses for the current year that
are not consistent with a prudent approach to risk.
… This tax will encourage banks to consider
their capital position and to make appropriate risk adjustments
when settling the level of bonus payments above the threshold,
which is at the level of median earnings in the UK. If banks
choose to make awards that are not consistent with a prudent approach
to risk, it is only fair that they contribute more to the public
finances, in a year when profits have been facilitated by significant
taxpayer support for the banking sector as a whole.
It is intended that in the longer term, the remuneration
practices will be changed as a result of corporate governance
and regulatory reforms … The one-off bank payroll tax will
apply until 5 April 2010, but the Government will consider extending
the period of the charge so that the tax remains in place until
the relevant provisions of the Financial Services Bill come into
force.
Tax measures necessarily involve taking property
from the citizen (or, in this case, banks) and therefore engage
Article 1 Protocol 1. However, the second paragraph of that Article
provides:
The preceding provisions shall not, however, in any
way impair the right of a state to enforce such laws as it deems
necessary … to secure the payment of taxes or other contributions
or penalties.
The powers of the state under this provision are
recognised by the European Court of Human Rights to be very wide.[6]
They are not, however, unlimited. Taxing measures must satisfy
the requirements of proportionality, but the threshold of justification
to be met by the State is very much lower than in relation to
other ECHR rights. The approach to be adopted to determining
whether a taxing measure is compatible with Article 1 Protocol
1 is authoritatively set out in the judgment of the High Court
in R (on the application of the Federation of Tour Operators)
v HM Treasury which concerned an Article 1 Protocol 1 challenge
by tour operators to the increase in Air Passenger Duty announced
in the 2006 Pre-Budget Report:[7]
[134] The latitude to be accorded by the judicial
branch of government to the Executive and Legislative branches
varies with the context: see the speech of Lord Nicholls in A
v Secretary of State for the Home Dept; X v Secretary of State
for the Home Dept [2004] UKHL 56 at [80], [2005] 2 AC 68 at [80]:
"80 … the courts will accord to Parliament
and ministers, as the primary decision-makers, an appropriate
degree of latitude. The latitude will vary according to the subject
matter under consideration, the importance of the human right
in question and the extent of the encroachment upon that right."
[135] The right engaged in the present case is less
important than Human Rights Convention rights under, for example,
arts 2, 3 and 5. In this connection, it is pertinent to recall
what the European Court of Human Rights said in James v UK (Application
8793/79) (1986) 8 EHRR 123, para 42 of the judgment:
"42 … the object and purpose of Article
1 (P1-1) … is primarily to guard against the arbitrary confiscation
of property."
The encroachment on the claimants' rights under A1P1
in this case does not approach confiscation, and does not demand
anxious scrutiny by the court. Far from it, in the present context
(see (1986) 8 EHRR 123, para 46):
"46. … The Court, finding it natural that
the margin of appreciation available to the legislature in implementing
social and economic policies should be a wide one, will respect
the legislature's judgment as to what is 'in the public interest'
unless that judgment be manifestly without reasonable foundation
…"
[136] Thus in the Gasus case [Gasus Dosier-und Fördertechnik
GmbH v Netherlands (Application 15375/89) (1995) 20 EHRR 403],
referred to above, the European Court of Human Rights held that
a measure entitling the Netherlands tax authorities to seize and
to realise property in the possession of a defaulting taxpayer
that belonged to the applicant, who had sold that property subject
to its retention of title, was not disproportionate. It expressed
the approach of the Court of Human Rights in such a case as follows
(see (1995) 20 EHRR 403, para 60 of the judgment):
"60. As follows from the previous paragraph,
the present case concerns the right of States to enact such laws
as they deem necessary for the purpose of 'securing the payment
of taxes' …
In passing such laws the legislature must be allowed
a wide margin of appreciation, especially with regard to the question
whether—and if so, to what extent—the tax authorities
should be put in a better position to enforce tax debts than ordinary
creditors are in to enforce commercial debts. The Court will respect
the legislature's assessment in such matters unless it is devoid
of reasonable foundation."
[137] In my judgment, there is no difference between
the approach of the court to a measure to secure the payment of
taxes in the sense of that considered in Gasus and the approach
to a substantive tax measure, ie a decision to impose a particular
tax or to increase it. In order to challenge successfully such
a measure, it must be shown that the legislature's assessment
is "devoid of reasonable foundation".
As the Court of Appeal in the same case made clear,
an indication of whether a taxing measure is "devoid of reasonable
foundation" will be whether it imposes "an individual
and excessive burden" on particular people.
Both the High Court and the Court of Appeal in the
Air Passenger Duty case concluded that, while the decision to
increase that tax was open to criticism, on grounds that the Treasury
had overlooked certain matters and it was a tax with retrospective
effect, nevertheless it was impossible to conclude that the measure
was "devoid of reasonable foundation", nor did it impose
an excessive or individual burden on tour operators. The Article
1 Protocol 1 challenge to the taxing measure therefore failed.
It is therefore clear that the hurdle facing anyone
challenging a taxing measure under Article 1 Protocol 1 is very
high. They must demonstrate that the measure is devoid of reasonable
foundation or imposes an excessive and individual burden which
is disproportionate to the public good. Even on the basis of
the summary justifications provided in the Pre-Budget Report it
would appear difficult to conclude that the measure is devoid
of reasonable foundation. The measure is likely to raise a not
insignificant amount of revenue (estimated to be about £0.55
billion); it is part of a package of measures designed to address
excessive risk-taking in the banking industry and to require banks
to consider the soundness of their capital base; it is directed
at banks rather than individual bankers; and it is intended to
be a one-off tax, in place only until the more systemic reforms
in the Financial Services Bill come into force. Nor is it likely
that those who are most directly affected by the new tax will
be able to demonstrate hardship amounting to an excessive individual
burden. In
our view it is therefore unlikely that the tax is incompatible
with Article 1 Protocol 1 ECHR.
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