HMRC have published a consolidated and expanded version of their guidance on the Code of Practice on Taxation for Banks.
Almost all banks operating in the UK have adopted the Code of Practice on Taxation, making commitments around tax governance, the types of transactions they will enter into and the way they will interact with HMRC. HMRC’s guidance on their approach to interpreting these commitments and identifying breaches of the Code (potentially leading to ‘naming and shaming’) was scattered across various publications. The release of consolidated guidance is therefore a welcome step which should make it easier to understand how HMRC operate the Code of Practice. This will be helped by the inclusion of commentary on the interaction of the Code obligations with the new requirements to publish tax strategies and on the important question of whether a particular tax outcome is contrary to the ‘intentions of Parliament’. The guidance clearly remains a work in progress, however, noting at several points that further detail will be included in future revisions.
An important new element of the consolidated guidance is an analysis of the interaction between the Code and the requirement for many groups to publicly disclose their tax strategies, which HMRC do not anticipate imposing new obligations on banks adhering to the Code.
HMRC expect published strategies to reflect Code commitments: for example, by enabling readers to see that adequate governance is in place for the bank to meet its obligations under the Code and setting out an attitude towards tax planning and risk which is consistent with the Code. Where the published strategies do not include this kind of information, HMRC have indicated that they may seek reassurances that the banks concerned remained committed to the Code.
Whilst HMRC’s comments are not surprising, it is still an important reminder of the scrutiny tax strategies can be expected to receive and the matters that HMRC expect them to address.
The other significant new element is a discussion of the meaning of the ‘intentions of Parliament’. Banks adopting the Code commit not to enter into tax planning or promote arrangements to third parties where the tax result is contrary to the intentions of Parliament and so agreeing what these intentions are is a key element of complying with the Code.
The new guidance refers to an increasing trend for the courts to seek to interpret legislation purposively and suggests that this can shed light on how the ‘intentions of Parliament’ should be discerned. The approach then set out by the guidance is however rather more relaxed than that usually permitted by the courts, which are typically restricted as to the kind of non-statutory materials they can refer to and the circumstances in which they can rely on them. The guidance assumes that reference should be had to any relevant non-statutory materials and the main criterion identified by HMRC for materials to be relevant is that they should have been taken into consideration by Parliament. On this basis the guidance rightly acknowledges that subsequent HMRC guidance is not itself evidence of Parliament’s intentions.
The guidance also confirms that if Parliament’s intentions cannot be discerned, even after referring to any available supplementary materials, then the tax outcome in question cannot be said to be contrary to those intentions and should therefore be regarded as permissible under the Code.
Even if Parliament’s intentions can be determined, the guidance identifies various cases where a contrary outcome would not constitute a breach of the Code. Two of these follow from the wording of the Code itself: firstly, where the bank had a reasonable, if mistaken, belief that the outcome was not contrary to Parliament’s intentions, and, secondly, where the outcome is not a result of tax planning. This latter point means that the bank’s own intentions may be as relevant as Parliament’s in identifying breaches of the Code.
More surprisingly, HMRC also indicate that they will not regard tax planning as breaching the Code, even if contrary to Parliament’s intentions, in cases where it is ‘established practice’. This is confined to situations where HMRC have previously indicated their acceptance of the practice, but it appears sufficient that such acceptance was in private correspondence with a single taxpayer or adviser.
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