Strengthening the Code of Conduct for Taxation on Banks

The Government has confirmed plans to strengthen the Code of Practice on Taxation for Banks (Code) by introducing more rigorous governance processes. It has published a summary of responses to the consultation on this and a technical note with draft clauses.

The proposed changes will be legislated for in Finance Bill 2014 and will ensure that, on signing up to the Code, banks fully commit to the obligations it sets out. Banks must adopt or re-adopt the strengthened Code by the day before the Autumn Statement, i.e. 3 December 2013.

Key points

Key points to note are:

• an annual report will be published by HMRC on the operation of the Code, which may include the naming of any bank that in HMRC's opinion is not complying with the Code;
• a new independent reviewer "of appropriate standing" will be asked to consider potential breaches of the Code. HMRC commissioners will have to take account of their views before deciding whether there is a breach. Banks that do breach the code could be named; and
• any transaction that the GAAR Advisory Panel has opined constitutes an unreasonable course of action and for which HMRC has issued a counteraction notice will be considered an automatic breach of the Code - resulting in the possible naming of the bank.

The Code requires banks to 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, and maintain a transparent relationship with HMRC.

The Code itself has not changed. However, the Governance Protocol, which sets out HMRC's communication and escalations procedures in any case where HMRC has concerns about a bank's compliance with the Code, is being substantially amended.

Safeguards for banks

Clearly, the "naming and shaming" of a bank in HMRC's annual report is likely to be a significant deterrent to behaviour contravening the Code. Understandably, therefore, the responses to the consultation largely expressed concern that there were insufficient safeguards for banks in the proposed process, particularly given the potential reputational risks to a bank of being named in an HMRC report.

HMRC has endeavoured to address this by a number of means including:

1. an independent reviewer will consider both whether HMRC has followed correct procedures and whether a bank has complied with its commitments under the Code;
2. banks are being given increased opportunities to make representations at each stage of the process; and
3. there will be a mandatory 30-day window following HMRC's final decision to name and shame in which to seek an injunction using judicial review proceedings.

The independent reviewer will be required to compile a report on whether, in its opinion, there has been a breach of the Code and if so whether the bank should be named in HMRC's report, having regard to any remedial or mitigating actions undertaken by the bank or any exceptional circumstances. If HMRC disagrees with the independent reviewer, it must explain the reasons for the difference of opinion. However, HMRC will remain the final arbiter under the governance protocol on whether a bank has breached the Code and there is no formal appeals process. Much therefore will depend upon the authority of the reviewer in practice and the extent to which HMRC follow its recommendations.

Referral to the GAAR Advisory Panel

Where there is unanimous or majority agreement among the GAAR Advisory Panel that the arrangements entered into by a bank are not a reasonable course of action and a counteraction notice has been issued, the role of the independent reviewer will be limited to considering whether the bank should be named in HMRC's annual report; it automatically constitutes a breach of the Code.

In all other cases where arrangements have been referred to the GAAR Advisory Panel, whether or not the bank has breached the Code will depend on all the facts and surrounding circumstances which could include whether the arrangements form part of a pattern of behaviour. HMRC must then follow the same escalation routes set out in the Protocol as with other suspected breaches.

Next steps

HMRC has stated that it does not intend to extend the Code to the "shadow banking" sector (as was requested by a few respondents to the consultation) but continues to evaluate the potential risks arising from entities which are able to offer similar services to the banking sector.

Comments on the revised draft legislation are invited but with no specific deadline for submission.

Please click on the links below for the other articles in the October 2013 tax newsletter.

• Aberdeen: PAYE on provision of shares in cash box companies
• Recent cases on employee incentivisation arrangements
• Adjustment of CGT for contingent liabilities: Morrison
• LLP members: deferred payments
• CISX Listings restricted