HMRC consults on strengthening big banks' tax Code of Practice

As announced in this year's Budget, the Government plans to formalise the Code in legislation. 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.

In its consultation, HMRC is seeking views on the nature of the annual report, how it will determine non-compliance with the Code and the processes and criteria it will use to decide whether to name a bank as non-compliant. The consultation also considers the timing around the adoption or reaffirmation of the strengthened Code by banks.

However, the consultation does not consider the contents of the Code itself as its wording remains "appropriate" and "the concepts and actions involved are now well understood by banks and practitioners".

"Since the introduction of the Code HMRC has seen a positive response by banks in relation to their tax planning and transparency. We believe that this is in large part down to changing attitudes by banks toward avoidance, and that the Code has been a significant factor in that change," said HMRC in its introduction to the consultation.

"Although the Code is generally operating well, it lacks public transparency. There are no obvious downsides for banks from not adopting the Code and no codified consequences for non-compliance with a bank's Code commitments," it 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. It has since been adopted by 262 banks.

Banks that have adopted the Code have committed to proper governance around tax, integrated into business decision-making. 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. The Code also states that HMRC and banks should work together to encourage "mutually open and transparent relationships".

According to the consultation, banks will remain free to choose whether to adopt or reaffirm the strengthened Code. However, the Government intends to "provide full transparency" about whether individual banks have adopted the Code. It plans to publish a full list of all banks that have adopted or readopted the Code as part of this year's Autumn Statement, giving current banks three months after the end of the consultation period to familiarise themselves with the new procedures.

HMRC has proposed keeping its assessment criteria roughly the same; however the consultation sets out "more explicit" processes and governance arrangements that will come into play if a bank is deemed to be non-compliant. In particular, HMRC proposes to build in a requirement for the Tax Assurance Commissioner to take the final decision on whether to name a bank as non-compliant in the annual report.

The consultation states that public naming is "not an end in itself, but rather a means of ensuring that the Code remains effective in preventing tax avoidance activity by banks". Although HMRC envisages that a conclusion of non-compliance will lead to a bank being named "in most cases", it may choose not to do so if "the bank takes actions that convince HMRC that the bank is committed to a cessation of tax avoidance behaviour going forward", the consultation said.