The industry is working frantically to put strategies in place ahead of publication of new rules on remuneration by the Committee of European Banking Supervisors in the second week of December. The Financial Services Authority will publish its own rules a few days after.
Tax advisers said options under consideration included structuring bonus payouts to minimise the amount of tax payable immediately; offering staff recourse loans to tide individuals over until their retained or deferred bonuses vest; issuing certificates of deposit or restricted loan notes in place of shares; and structuring payments to attract a capital gains tax liability instead of income tax.
However, any efforts to mitigate the rules will be closely scrutinised by the FSA, which has said it will clamp down on any attempts to get round the spirit of the rules.
Sam Whitaker, counsel in law firm Shearman & Sterling's executive compensation and employee benefits practice, said: "Most banks already have their strategy in place."
Financial News reported this month that under the proposed rules staff at UK banks who are paid more than £1m could end up paying out more in tax than they receive in cash.
Jon Terry, head of reward at accountancy firm PwC, said: "The primary focus this year is to ensure that staff don't get hit with a tax liability for the retention element of their bonus, and to get cash into the hands of their most senior people."
As the proposed rules stand, 60% of the total bonus for bankers who earn more than £1m must be deferred, 20% will go into a "retention" pot and 20% will be paid as cash. One of the priorities for the banks is ensuring top earners are not hit with a tax liability for the retention element of their bonus.
One way to avoid such a situation occurring is to structure the retention element so that there is a theoretical risk of losing, making the award ineligible for tax until delivery, according to one tax lawyer.
Banks are also considering issuing certificates of deposit or restricted loan notes. These can be issued to minimise a tax liability, but could also be used in place of shares as part of a deferral arrangements. Advisers are awaiting further clarification on this issue from the final CEBS guidelines.
Sophie Dworetzsky, a partner at law firm Withers, said: "If the recipient wants to be subject to capital gains tax rather than income tax when value is realised, it is possible to achieve this, but in this case income tax will have to be paid upfront on grant of the certificates of deposit. The employer can look into making a loan to discharge the income tax liability in this situation."
Another option for banks is to offer recourse loans to certain staff. CEBS sets out in its guidelines that non-recourse loans, where the loan could be written off after a certain period, are disallowed. However, recourse loans – which give power to the lender and cannot be written off – may be offered selectively to certain staff, say advisers.
Banks which pay bonuses in January – including JP Morgan and Goldman Sachs – are expected to present their plans to staff in the next few weeks. Others are unlikely to make any concrete plans until the CEBS guidelines have been confirmed.
Several European and US banks have already announced they will increase fixed pay to minimise the cash impact of incoming bonus rules. HSBC this month confirmed it was increasing base salaries as a proportion of total compensation. It follows similar moves from Credit Suisse and Royal Bank of Scotland.
Credit Suisse and Goldman Sachs also paid selected staff mid-year bonuses in expectation of the new rules. Credit Suisse paid out cash bonuses to around 400 senior London-based staff in September. Goldman Sachs, which capped bonuses at £1m last year, handed out shares to about 80 senior bankers also in September.
Any attempts to soften the blow for bankers are likely to get short shrift from regulators. Employee trusts, which had been used by banks to minimise the tax burden on deferred bonuses in the past, are being challenged in the courts by HM Revenue & Customs.
Jonathan Fenn, a partner at law firm Slaughter and May, said: "Recent challenges by the Revenue, and the Revenue's announcement that it is reviewing the use of trusts and other vehicles in the remuneration context have made tax planners increasingly nervous about using 'highly engineered' structures .
A spokeswoman for the FSA said: "We would encourage firms to engage with the new rules as soon as possible. The CRD [Capital Requirements Directive] contains anti-avoidance measures and the FSA would take a very dim view of any efforts to avoid the rules. Firms need to comply not only with the rules but also the spirit of the code."
Alistair Woodland, a partner at law firm Clifford Chance, said: "The truth is that no one will escape the new bonus rules completely."
Liam Vaughan and Tara Loader Wilkinson contributed to this article.
