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Tax Code of Practice for Banks
Practical Law Legal Update 6-422-1900 (Approx. 2 pages)
Tax Code of Practice for Banks
by Louise Higginbottom, Norton Rose LLP
| Published on 11 Aug 2009 • United Kingdom |
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HM Revenue & Customs are consulting on a voluntary tax code of practice for banks operating in the UK which aims to reduce tax avoidance through a number of measures affecting banks' governance, tax practices and their relationships with HMRC.
HM Revenue & Customs (HMRC) are consulting on a voluntary tax code of practice which banks operating in the UK will be asked to sign (Code). The Code represents a significant departure from normal practice as banks which sign up will no longer be able to arrange their affairs as they please, but will be required to reject transactions that result in tax avoidance. This will be determined not by reference to the letter of the law, but by its 'spirit', or the so-called intention of Parliament. Although signing up will be voluntary, banks which do not will face greater scrutiny.
The Code has three sections:
- Governance. This requires banks to have a formal tax governance regime which includes a process for approving tax products.
- Tax planning. This requires banks not to engage in tax planning, other than that which supports genuine economic activity. Where a bank is acting as principal, transactions should not be structured with tax results that are inconsistent with the economic result unless this is the aim of specific legislation. In such cases, transactions must not be structured so as to give a tax result that is 'contrary to the intentions of Parliament'. Banks should also not promote arrangements that are contrary to the intentions of Parliament. They should also ensure that remuneration is structured so that proper amounts of tax and national insurance are paid.
- Relationship with HMRC. This requires banks to work co-operatively and openly with HMRC. Where proposed transactions may be contrary to the intentions of Parliament they should be explained to HMRC in advance.
Although implementing the governance and relationship aspects of the Code should not be too onerous for banks, the breadth of the tax planning provisions is likely to be of concern as they appear to leave little scope for tax planning. Examples of tax avoidance are cited, but these do not contain sufficient detail to provide a satisfactory understanding of HMRC's reasoning and there is no commentary on how or why the examples go against Parliament's intention: "it is usually self-evident that a tax result is contrary to the intention", seems to be the approach.
In the current economic climate banks may find it hard to justify not signing the Code. However, banks which do sign will find themselves in a different position from near competitors in different sectors, and banks that do not sign up. A more balanced approach may be a code which combines the governance and relationship proposals with a tax planning section which prohibits extremes of tax avoidance.