Tax Code of Conduct for Banks

The Government has recently concentrated on addressing some banks’ involvement in large scale tax avoidance schemes, following various reports and leaks, particularly from Government supporters, that banks have been acting as principals in such schemes and providing a service to customers in respect of such schemes. Also, of course, putting an end to such schemes should produce more revenue for the Government.

HM Revenue & Customs published in June 2009 a paper on a proposed Code of Conduct in respect of these matters which is intended to be voluntarily adopted by banks operating in the U.K. with the intention that banks comply with the spirit as well as the letter of tax law.

The Code is divided into three main areas:

• Banks should not undertake tax planning that aims to achieve a result contrary to the intentions of Parliament;
• The governance of the banks should be adequate to control the transactions into which they enter; and
• The banks must adopt a transparent relationship with HM Revenue & Customs.

Where a bank is acting as a principal, the Code suggests that the tax results of any transaction should be consistent with the underlying economic consequences of the transaction both for the bank and for any other party and that the results should not be contrary to the intentions of Parliament.

The Code also expects banks not to promote arrangements that run contrary to the intentions of Parliament which may well include not promoting avoidance schemes even where those schemes do not fall within the provisions of the Finance Act 2004. It should be noted that the Code specifically does not prevent banks from facilitating transactions which “generate a tax advantage for others”.

HM Revenue & Customs have provided a list of those matters that indicate the probability that the transactions are unacceptable to them including:

1. Transactions that have little or no economic substance;
2. Transactions with little pre-tax profit but have a return relying on significant post-tax profit;
3. Transactions relying on a mismatch between legal format and the economic substance; and
4. Transactions involving unnecessary steps.

The consultation paper suggests ways in which the Code could be enforced for instance banks who do not sign up to it or do not comply with it may well be determined automatically as high risk tax payers and therefore subject to greater scrutiny. Also, HM Revenue & Customs suggest that individual officers could be reported to the relevant professional body.

HM Revenue & Customs propose that if banks are uncertain about the effect of the Code on any of their potential transactions and then they should discuss with HM Revenue & Customers in advance.

If you would like to discuss any of the issues raised in this article please contact either Tim Roberts or Troy Warner or call 01908 692769.