City in revolt over Darling's levy on bonuses

Banks, fund managers, stockbrokers, lawyers, accountants and just about everyone plying their trade in the City of London will tomorrow look for clarification over rules on the taxing of bonuses after days of confusion since the pre-Budget report (PRB).

Her Majesty's Revenue and Customs (HMRC) is expected to explain key details of the 50 per cent levy on "bank" bonus payments of £25,000 or more to "relevant banking employees". The tax runs until the 5 April 2010, although a technical note issued by the Government last week indicates it could be extended.

Firms in the Square Mile have been working around the clock this weekend to ascertain whether they fall into the new 50 per cent super tax net unveiled by the Chancellor, Alistair Darling, on Wednesday.

Groups have also been scouring the fine print of the PRB to find ways to avoid paying the tax, including the hiking and backdating of salaries.

However, the difficulties of dodging the new rules and falling foul of anti-avoidance measures have been illustrated by Barclays' decision to hold fire on backdating salaries to bankers in its investment banking arm, BarCap. It is believed the decision was based upon legal advice.

Chris Sanger, head of tax policy at Ernst & Young, said: "The tax is a stopgap until the regulatory regime is in place following the Finance Bill. At the moment there is a lot of uncertainty and we are expecting more details this week. What we need to know is whether giving up bonuses this year in anticipation of a bigger bonus next year is an acceptable response from the banks. In the meantime, I think we can expect a lot of firms to delay paying bonuses to their staff."

Last week, Arden Partners, the City stockbroker, postponed the publication of its results, due this month, until the bonus issue had been clarified. Arden's decision prompted an unlikely alliance between eight City stockbroking firms, which have jointly hired PricewaterhouseCoopers to fight their corner against the Treasury's plans.

"Nobody knows what is going on," said one broker. "The drafting looks like it's been done on the back of a fag packet. Once again, we are left to pick up the mess. We've all had to pay accountants to clarify what the hell is going on. And, in some cases, even they don't have a clue!"

Fund managers and hedge funds are largely breathing a sigh of relief this weekend with indications from HMRC that they will not be subjected to the new tax. This comes following extensive lobbying by the sector.

The French government has said it may follow Britain's lead, but US Treasury officials ruled out a similar intervention across the Atlantic.