The code of practice on taxation for banks (the code) was introduced in 2009 and applies to banks and building societies. It is designed to change the attitudes and behaviours of banks towards tax avoidance. It encourages banks operating in the UK to adopt best practice in relation to their own UK tax affairs, and not to promote or knowingly facilitate UK tax avoidance by others.
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:
- adopt adequate governance to control the types of transactions they enter into
- not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament
- comply fully with all their tax obligations
- maintain a transparent relationship with HM Revenue and Customs (HMRC)
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.
- Tax planning
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.
- Relationship between the bank and HMRC
Relationships with HMRC should be transparent and constructive, based on mutual trust wherever possible.
The features of this relationship should include:
- disclosing fully the significant uncertainties in relation to tax matters
- focusing on significant issues
- seeking to resolve issues before returns are filed whenever practicable
- engaging in a co-operative, supportive and professional manner in all interactions
- working collaboratively to achieve early resolution and hence certainty
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:
- If HMRC is concerned about a bank's behaviour in relation to the code, the bank's customer relationship manager (CRM) will raise this with the bank and ask it to make representations on the issue. HMRC expects "an open collaborative conversation" to take place.
- If concerns remain, the CRM is obliged to consult HMRC technical and policy experts and to get various internal sign offs before concerns can again be expressed to the bank.
- There will then be a discussion between an HMRC director and the board of the bank (probably the chief financial officer). However, the protocol says this discussion will probably not happen if HMRC's concerns relate to a single transaction undertaken or promoted by a bank which includes tax planning which gives a tax result that is contrary to the intentions of Parliament which is not part of an emerging pattern of behaviour by the bank or a potential GAAR transaction.
- If HMRC still has concerns, the matter has to then be referred to HMRC's Tax Disputes Resolution Board (TDRB). The TDRB's main role is to consider proposals for settling all significant tax disputes in accordance with HMRC's Code of Governance for Resolving Tax Disputes. It is comprised mainly of directors of HMRC's specialist divisions including the director of large business and the director of corporation tax, international & stamps. When a referral is made to the TDRB, the bank has a further opportunity to make representations which have to be considered by the TDRB.
- The TDRB then makes a recommendation to the HMRC commissioners. The commissioners are senior members of HMRC appointed by the Queen. There are currently five commissioners including HMRC executive chair, Edward Troup and HMRC chief executive, Jon Thompson.
- If the TDRB considers that the bank has breached the code, the bank will be asked to set out any remedial or mitigating action or any exceptional circumstances that should be taken into account in determining whether the bank should be named.
- The TDRB will consider whether any mitigating or remedial action undertaken by the bank or exceptional circumstances are such that the bank should not be named in the annual report. The TDRB's decison as to whether or not the bank should be named will be notified to the bank with the TDRB's reasons.
- The matter then gets referred to the 'independent reviewer', a person appointed by the HMRC commissioners who is independent of both HMRC and the bank. The bank has another opportunity to make representations and the independent reviewer then compiles a report on whether in his or her opinion there has been a breach of the code. If he or she considers there has been a breach the reviewer also has to give a view on whether, taking into account any remedial or mitigating actions undertaken by the bank or any exceptional circumstances, HMRC should publish, in the HMRC annual report, the name of the bank as having breached the code.
- Once the independent reviewer has delivered his or her report to the bank and HMRC, the bank has an opportunity to make written representations on the report to the commissioners.
- The commissioners will then consider whether the bank has breached the code and whether the bank should be named, having regard to the independent reviewer's report and any representations made by the bank. The commissioners can only make a determination that is different to that of the independent reviewer if they consider the independent reviewer’s determination was unreasonable or where exceptionally there are other compelling reasons for making a different determination.
- If the commissioners think that they are going to disagree with the independent reviewer, then before reaching their final decision they have to explain their reasons to the independent reviewer and give him or her and the bank an opportunity to comment on that explanation. The commissioners then have to have regard to any comments of the independent reviewer and the bank before reaching their final decision.
- The bank's board will be informed of the commissioners' decision and if HMRC has decided that the bank has breached the code and should be named in an annual report, there must be a delay of at least 90 days before the annual report is published. This 90 day period will allow the bank to challenge the decision by way of judicial review, before its name is published.
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.
Ian Hyde and Darren Mellor-Clark are tax experts at Pinsent Masons, the law firm behind Out-Law.com.