Revised Banking Code of Practice gives HMRC too much discretion, says expert

Tax expert Ray McCann of Pinsent Masons said that the proposed changes to the Code of Practice on Taxation for Banks were "unsatisfactory" and would, in some areas, "cause even greater concern" to banks than those consulted on over the summer. The Government has proposed appointing an 'independent reviewer' who will be asked to consider potential breaches of the Code, but the final decision will rest with HMRC. Banks that do not comply with the Code of Practice may be named.

"There remains a lack of statutory control over how HMRC would use this power and further work needs to be done to ensure that how the Code is used is transparent, because as matters stand HMRC remains able to exercise too much discretion without effective independent oversight," he said.

"That HMRC will nevertheless be able to name and shame a bank despite the findings of the newly-proposed independent review feels even less just to banks than the original proposals, since in addition to causing significant risks to banks, it undermines the purpose of the independent review itself," he said.

The Code of Practice on Taxation for Banks (2-page / 18KB PDF) was introduced in 2009 to encourage banks to follow "the spirit as well as the letter of the law" in their tax planning, both in relation to their own tax affairs and those of their customers and employees. Although voluntary, the Government announced in November 2010 that the top fifteen banks operating in the UK had adopted the Code. The Code has now been adopted by 262 banks in total.

Banks that have adopted the Code have committed to comply fully with all their tax obligations and adopt adequate governance to control the types of transactions that they enter into. They may undertake tax planning to support their business operations, but this should not be used to achieve tax results that go against the intentions of Parliament. They must also maintain a "transparent" relationship with HMRC.

As announced in this year's Budget, the Government plans to formalise the Code in legislation. It has now confirmed that this will be done as part of the 2014 Finance Bill. From 2015, HMRC will be required to publish an annual report on the operation of the Code, listing those banks that have adopted it. It may also choose to name those banks that, in the opinion of HMRC, are not complying with the Code. Banks will have to adopt or re-adopted the revised Code, and the first list of the banks that have done so will be published in the autumn.

Under the new regime, any transaction that falls within the scope of the new General Anti-Abuse Rule (GAAR) would be considered an automatic breach of the Code. The GAAR applies to the main direct taxes and is designed to prevent "artificial and abusive" tax avoidance schemes that fail to pass a 'double reasonableness' test showing that the arrangements "cannot reasonably be regarded as a reasonable course of action". A GAAR Advisory Panel will provide guidance and non-binding opinions on cases where HMRC considers that the GAAR may apply.

McCann said that where HMRC was seeking to rely on GAAR to prove a breach of the revised Code, any decision by the GAAR Advisory Panel would have to be unanimous.

"A split decision should not be able to trigger sanctions as regards compliance with the Code, especially since whether the GAAR actually applies to that particular transaction may not be decided until years after a bank has been named," he said.