Jonathon Egerton-Peters provides an overview of the code of practice for banks following last week’s Autumn Statement and this week’s draft Finance Bill legislation.
he code of practice on taxation for banks (‘the code’) was first introduced in December 2009 as a measure designed to encourage banks operating in the UK to follow both the letter and spirit of UK tax law. Although adoption of the code is voluntary, a significant number of banks have adopted it.
On 5 December 2013, HMRC published the full names of the 264 banks, building societies and other financial institutions which had unconditionally adopted or readopted the code. Further measures to strengthen the code are being proposed in the Finance Bill 2014.
What are the main features of the code?
The code is designed to regulate banks’ tax affairs in three key ways. First, in the context of governance, banks must have in place a formal policy containing a strategy and governance process for their taxation matters.
Second, in the context of tax planning, banks ought not to engage in any planning which does not support genuine commercial activity or which might achieve a tax result that is contrary to the intentions of Parliament.
Third, in the context of banks’ relationships with HMRC, banks should maintain relationships that are transparent, constructive and based, wherever possible, on mutual trust.
What happens if a bank does not comply with the code?
HMRC has a number of communication and escalation procedures which it can adopt if it has concerns about a bank’s compliance with the code. One of the most interesting is the ‘naming and shaming’ power which has been proposed. This will permit HMRC to name publicly a bank which it considers is in breach of the code.
A decision to name a bank must follow the processes in HMRC’s governance protocol (this was recently revised to reflect the Finance Bill 2014 proposals). These require HMRC to establish a dialogue with the bank concerned, following which referrals to the Tax Disputes Resolution Board (TDRB) and an independent reviewer may take place, in order for them to provide a view on a bank’s compliance with the code. The banks may make representations to the TDRB and the independent reviewer.
Ultimately, however, it is HMRC that will decide whether a bank has breached the code (although if the GAAR advisory panel issues an opinion that favours the application of the GAAR to a particular arrangement and HMRC issues a notice of counteraction to the bank, the bank will be in automatic breach of the code due to the arrangement, even though HMRC’s notice could be appealed) and if it ought to be publicly named.
What can banks do to prepare themselves for when the ‘naming and shaming’ powers come into force?
Crucially, although the legislation enacting the ‘naming and shaming’ provisions is not expected to be passed until summer 2014, that legislation will apply to any breaches of the code that occur from 5 December 2013 (or, if later, from when the bank agrees to adhere to the code). Banks ought to be taking steps now to ensure they are code-compliant.
Otherwise, how to react to possible naming will need to be very fact-specific. It will be critical, however, to ensure that proper legal advice is on hand as soon as any concern is raised by HMRC. The advice obtained should be considered in light of a strategy plan which is reviewed throughout the process. It will also be important to have regard to the relevant time limits for making representations; these limits are relatively short and frequent, so it will be vital to have everything in place at the right time in order to ensure the representations are as persuasive as possible. Throughout the process, it would also be prudent to ensure that legal professional privilege is available to the fullest extent; legal advice received, for example, from lawyers will be protected by privilege, but the same advice from non-lawyer professionals (such as tax advisers) would not be so protected.
Ultimately, if HMRC decides to name a bank (perhaps even despite this being contrary to the independent reviewer’s determination), the bank can apply to the English courts to obtain an injunction to prevent HMRC from going ahead. Given the increasing role of the ‘court of public opinion’ and the reputational damage that can be caused by (sometimes unmerited) media criticism of banks’ tax affairs, taking such action may be imperative.
Does the ‘court of public opinion’ really matter?
I think there is little doubt that, in the current climate, public opinion has at least some role in tax administration within the UK. The tax affairs of both corporations and individuals are increasingly the fodder for front page journalists.
This said, the role of the court of public opinion is still a changing and uncertain one, and I should add, one that is not without a number of concerns. Indeed, the public is not necessarily always well-placed to play such an active role. Often, the relevant tax affairs of another are so incredibly complex that they cannot be adequately summarised in bite-sized newspaper articles. There is then a danger that the court of public opinion may pass judgment on tax affairs without fully appreciating the relevant law or issues. Whatever role the public is to have, it is of fundamental importance that it is apprised of all the relevant facts, in order to avoid any knee-jerk reactions.
It will be interesting to see how the public opinion’s role develops. If the ‘naming and shaming’ proposals in the code are a success, similar concepts may well be extended beyond the banking sector. Multinational enterprises, which are the focus of proposals to prevent base erosion, profit shifting and double non-taxation are, one group of taxpayers which may be the subject of such future expansion, particularly in light of current OECD efforts to reform these areas.
Jonathon Egerton-Peters provides an overview of the code of practice for banks following last week’s Autumn Statement and this week’s draft Finance Bill legislation.
he code of practice on taxation for banks (‘the code’) was first introduced in December 2009 as a measure designed to encourage banks operating in the UK to follow both the letter and spirit of UK tax law. Although adoption of the code is voluntary, a significant number of banks have adopted it.
On 5 December 2013, HMRC published the full names of the 264 banks, building societies and other financial institutions which had unconditionally adopted or readopted the code. Further measures to strengthen the code are being proposed in the Finance Bill 2014.
What are the main features of the code?
The code is designed to regulate banks’ tax affairs in three key ways. First, in the context of governance, banks must have in place a formal policy containing a strategy and governance process for their taxation matters.
Second, in the context of tax planning, banks ought not to engage in any planning which does not support genuine commercial activity or which might achieve a tax result that is contrary to the intentions of Parliament.
Third, in the context of banks’ relationships with HMRC, banks should maintain relationships that are transparent, constructive and based, wherever possible, on mutual trust.
What happens if a bank does not comply with the code?
HMRC has a number of communication and escalation procedures which it can adopt if it has concerns about a bank’s compliance with the code. One of the most interesting is the ‘naming and shaming’ power which has been proposed. This will permit HMRC to name publicly a bank which it considers is in breach of the code.
A decision to name a bank must follow the processes in HMRC’s governance protocol (this was recently revised to reflect the Finance Bill 2014 proposals). These require HMRC to establish a dialogue with the bank concerned, following which referrals to the Tax Disputes Resolution Board (TDRB) and an independent reviewer may take place, in order for them to provide a view on a bank’s compliance with the code. The banks may make representations to the TDRB and the independent reviewer.
Ultimately, however, it is HMRC that will decide whether a bank has breached the code (although if the GAAR advisory panel issues an opinion that favours the application of the GAAR to a particular arrangement and HMRC issues a notice of counteraction to the bank, the bank will be in automatic breach of the code due to the arrangement, even though HMRC’s notice could be appealed) and if it ought to be publicly named.
What can banks do to prepare themselves for when the ‘naming and shaming’ powers come into force?
Crucially, although the legislation enacting the ‘naming and shaming’ provisions is not expected to be passed until summer 2014, that legislation will apply to any breaches of the code that occur from 5 December 2013 (or, if later, from when the bank agrees to adhere to the code). Banks ought to be taking steps now to ensure they are code-compliant.
Otherwise, how to react to possible naming will need to be very fact-specific. It will be critical, however, to ensure that proper legal advice is on hand as soon as any concern is raised by HMRC. The advice obtained should be considered in light of a strategy plan which is reviewed throughout the process. It will also be important to have regard to the relevant time limits for making representations; these limits are relatively short and frequent, so it will be vital to have everything in place at the right time in order to ensure the representations are as persuasive as possible. Throughout the process, it would also be prudent to ensure that legal professional privilege is available to the fullest extent; legal advice received, for example, from lawyers will be protected by privilege, but the same advice from non-lawyer professionals (such as tax advisers) would not be so protected.
Ultimately, if HMRC decides to name a bank (perhaps even despite this being contrary to the independent reviewer’s determination), the bank can apply to the English courts to obtain an injunction to prevent HMRC from going ahead. Given the increasing role of the ‘court of public opinion’ and the reputational damage that can be caused by (sometimes unmerited) media criticism of banks’ tax affairs, taking such action may be imperative.
Does the ‘court of public opinion’ really matter?
I think there is little doubt that, in the current climate, public opinion has at least some role in tax administration within the UK. The tax affairs of both corporations and individuals are increasingly the fodder for front page journalists.
This said, the role of the court of public opinion is still a changing and uncertain one, and I should add, one that is not without a number of concerns. Indeed, the public is not necessarily always well-placed to play such an active role. Often, the relevant tax affairs of another are so incredibly complex that they cannot be adequately summarised in bite-sized newspaper articles. There is then a danger that the court of public opinion may pass judgment on tax affairs without fully appreciating the relevant law or issues. Whatever role the public is to have, it is of fundamental importance that it is apprised of all the relevant facts, in order to avoid any knee-jerk reactions.
It will be interesting to see how the public opinion’s role develops. If the ‘naming and shaming’ proposals in the code are a success, similar concepts may well be extended beyond the banking sector. Multinational enterprises, which are the focus of proposals to prevent base erosion, profit shifting and double non-taxation are, one group of taxpayers which may be the subject of such future expansion, particularly in light of current OECD efforts to reform these areas.
