Any changes to tax structures in curbing the culture and volume of City bonuses won’t be effective, according to leading tax experts.

In a testing political climate, with the unions calling for a tax crackdown on the City, and bonuses selected as a particular target, there have been suggestions that bonuses could be taxed more heavily.

Advisers don’t see it as practical, however. Mike Warburton, senior tax partner at Grant Thornton, said historical evidence shows any changes in raising tax rates to be counter productive. He argues the current 40% rate is the correct level in maximising the level of income tax collected by the Treasury.

‘You can’t have something which says we’re going to have a special tax for people who work in the City and earn over a certain amount… I’m not trying to protect people who earn over £200,000 per year.

It would just be counter productive,’ Warburton said.

Chancellor Alistair Darling is under increasing pressure to implement a more transparent regime in the recording of bonuses paid to City executives.

The Financial Services Authority is thought to be considering measures in stemming the issue, including the possibility of banks being obliged to retain capital if excessive risks were carried out in securing bonuses.

Warburton said bank behaviour ought to change. ‘It would be wrong to apply a special tax rate for higher income levels because it’s been proved to be ineffective. Banks needs to have some moderation,’ he said.
According to Chas Roy-Chowdhury, head of taxation at the ACCA, irrespective of whether there is a change to tax structure, there needs to be an improved audit trail on bonuses paid, and a direct correlation between remuneration and how the bonus has materialised.

‘There really isn’t a simple answer. Whether it’s a good or bad idea, I don’t know. It’s difficult to see the profit trail of their work,’ he said.

Richard Murphy, advisor at the Tax Justice Network, said that there are limited options from a tax perspective, but that the Treasury could potentially increase the rate applied to employer’s national insurance on salaries over a certain threshold, nominating £200,000 as a prospective cutoff.