Out-Law Guide 7 min. read
10 Jul 2017, 1:31 pm
This guide was updated in July 2017.
From 2015, HMRC has been required to publish an annual report on the operation of the code. This sets out which banks which have adopted the code and those which have not. HMRC may name in the annual report any bank that it considers has not complied with its code commitments. The 2016 report was published in November 2016.
The code is as follows:
The government expects that banking groups, their subsidiaries, and their branches operating in the UK, will comply with the spirit, as well as the letter, of tax law, discerning and following the intentions of parliament.
This means that banks should:
The bank should have a documented strategy and governance process for taxation matters encompassed within a formal policy. Accountability for this policy should rest with the UK board of directors or, for foreign banks, a senior accountable person in the UK.
This policy should include a commitment to comply with tax obligations and to maintain an open, professional, and transparent relationship with HMRC.
Appropriate processes should be maintained, by use of product approval committees or other means, to ensure the tax policy is taken into account in business decision-making. The bank’s tax department should play a critical role and its opinion should not be ignored by business units. There may be a documented appeals process to senior management for occasions when the tax department and business unit disagree.
The bank should not engage in tax planning other than that which supports genuine commercial activity.
Transactions should not be structured in a way that will have tax results for the bank that are inconsistent with the underlying economic consequences unless there exists specific legislation designed to give that result. In that case, the bank should reasonably believe that the transaction is structured in a way that gives a tax result for the bank which is not contrary to the intentions of Parliament.
There should be no promotion of arrangements to other parties unless the bank reasonably believes that the tax result of those arrangements for the other parties is not contrary to the intentions of Parliament.
Remuneration packages for bank employees, including senior executives, should be structured so that the bank reasonably believes that the proper amounts of tax and national insurance contributions are paid on the rewards of employment.
Relationships with HMRC should be transparent and constructive, based on mutual trust wherever possible.
The features of this relationship should include:
Where the bank is in doubt whether the tax result of a proposed transaction is contrary to the intentions of Parliament, to help the bank form its reasonable belief under section 3, it may discuss its plans in advance with HMRC."
Contravention of the code
A governance protocol has been published, which explains the communication and escalation routes where HMRC has concerns that a bank may not have met its code commitments.
The protocol sets out the steps in detail and the time limits for notifications and making representations, but in summary:
One of the most difficult areas of interpretation in relation to the code is whether a particular piece of tax planning is contrary to the code. This requires an assessment of whether the planning aims to achieve a tax result that is contrary to the intentions of parliament.
HMRC's consolidated guidance on the code of practice on taxation for banks sets out the approach HMRC will take. In the guidance HMRC states that it will first consider the arrangements with particular focus on whether they support genuine commercial activity and the tax outcome is consistent with the underlying economic consequences.
HMRC will then look at the legislation purposively; considering the provisions in a broader context and possibly referring to supplementary materials provided to Parliament when it considered the legislation.
If after reviewing the legislation, and supporting documents, it is clear that the tax result is contrary to the intentions of parliament then HMRC will check to see whether this tax result has become permissible through established practice.
The guidance makes it clear that planning will be code compliant if it is reasonable for the bank to believe that the tax result is not contrary to the intentions of parliament, even if HMRC disagrees with the bank’s tax analysis.
The established practice test will only be met when HMRC has indicated its acceptance of that practice, perhaps in guidance or in correspondence. The guidance makes it clear that an arrangement will not be established practice just because the government has not yet changed the law – the bank has to reasonably believe that HMRC has accepted the practice.
The code requires banks to have a tax strategy. In a separate development, all large companies and partnerships, including banks, are required not only to have a strategy but to publish their tax strategy online before the end of their first financial year beginning after 15 September 2016.
To date, no banks have been named by HMRC as breaching the code. However, it may only be a matter of time before the first bank falls foul of the code and has its name published. Clearly this could have significant reputational issues. With HMRC's attitude to tax planning hardening in the face of political and public pressure to clampdown on tax avoidance, banks need to keep the code firmly in mind in all their tax dealings.