The HMRC released a consultation document on 31 May 2013 in respect of amendments to the code of practice on taxation for banks. Comments on the proposed changes are invited by 16 August 2013. The provisions of the code cover the required practices of banks in respect of corporate governance, tax planning and liaison with HMRC. The code aims to ensure that banks adopt best practice in respect of their taxation strategy. It is not compulsory for banks to adopt the code of practice but so far 262 banks and building societies including the 15 largest banks have adopted the code.

A code of practice was seen as necessary for banks in particular because they have been seen in the past as promoting tax avoidance schemes in addition to avoiding their own tax liabilities and those of their staff in respect of salaries. The financial services they provide to their customers are very often products that involve some tax element and that in some cases may be used for tax avoidance. Also, banks have access to capital that can be used in implementing tax avoidance schemes and this allows them to benefit financially from avoidance schemes designed by other parties.

The code of practice requires banks to have strong internal procedures with regard to decision making on tax matters. If banks have adopted the code their tax planning in respect of business operations should follow the spirit as well as the letter of the law and they should maintain a transparent relationship with HMRC.

There is however no clear disadvantage for a bank that decides not to adopt the Code of Practice on tax and there are no clear penalties for a bank that adopts the Code but does not comply with its requirements. There have also been differences in interpretation of the Code from one bank to another. Although HMRC applies a consistent approach to banks with regard to the Code, the perception by stakeholders that there are differences in its application weakens the effect of the Code.

Measures have therefore been proposed to introduce legislation requiring HMRC to produce an annual report on the operation of the Code. The report would list banks that have not adopted the Code and would name any bank that has adopted the Code but is not complying with its provisions. The consultation paper has been issued to gather views on the process by which non-compliance with the Code can be identified; the criteria used to reach a decision on naming a bank as non-compliant; and the content of the annual report that HMRC will produce. The consultation does not cover any changes to the Code of Practice itself.

Banks that choose to be subject to the strengthened Code of Practice will be required to confirm their commitment to the requirements of the Code. HMRC will then publish at the time of the Chancellor’s Autumn Statement a list of banks that have adopted or confirmed their re-adoption of the Code. From 2015 onward HMRC will issue an annual report on the operation of the Code and this will include an updated list of banks that have adopted the Code and of those banks that have chosen not to adopt it. The legislation making these changes is to be included in the Finance Bill 2014.

When the Code was originally issued, small banks adopting it were only required to sign up to section 1 in respect of governance and transparency. Adoption of the whole Code was seen as putting an excessive governance requirement and extra cost on smaller banks, even though there would be benefits in terms of transparency. The consultation document invites views on whether this is still a valid approach under the strengthened measures.

The timetable for adoption of the new measures allows banks around three months between the close of the consultation on 16 August and the Autumn Statement (normally in November or early December) to decide on adopting the strengthened Code. Banks could liaise with their HMRC Customer Relationship Manager (CRM) during this period and clarify areas of concern. The consultation document invites views from interested parties on the proposed timetable.

It will be important for banks signing up to the strengthened Code of Practice to understand how HMRC will arrive at the decision on whether a bank is complying with the Code.  HMRC has already published a Governance Protocol for ensuring compliance with the Code. This was issued on 26 March 2012 and sets out a process for communicating with non-compliant banks and taking further measures where banks continue not to comply with requirements. HMRC now intends to further clarify these procedures and to include a requirement for the final decision to name a non-compliant bank to be taken by the Taxation Assurance Commissioner.

After HMRC has taken a decision that a bank is not compliant this will be communicated to the management of the bank. Where the actions of the bank are not related to a potentially abusive transaction, HMRC will set out the actions that the bank should take to comply with the Code. The bank will be given an opportunity to convince HMRC that actions are being taken to change its non-compliant tax behavior and that no further purpose would be served by naming the bank as non-compliant.

 If the bank’s actions concern potentially abusive transactions a report will immediately be compiled by HMRC for the Tax Assurance Commissioner, who takes a decision on whether the bank should be named as non-compliant in the next annual report by HMRC under the Code. In other cases HMRC will await the bank’s response and then send a report to the Tax Assurance Commissioner within three months for a decision on naming the bank. Where a decision is made to name a bank, that bank would have recourse to legal measures such as Judicial Review but there would be no formal right of appeal because the Code of Practice is voluntary.

The consultation document is inviting views on whether the procedure provides sufficient safeguards for banks that may be named as non-compliant and on whether the process is sufficiently transparent. Respondents may also suggest other enhancements to the process. The document also presents some case studies in respect of situations where HMRC might consider whether a bank is complying with its responsibilities under the Code. Comments are requested from interested parties on whether these examples provide sufficient guidance on actions that might lead to the conclusion that a bank is non-compliant.

The consultation document clarifies that while the general anti-abuse rule (GAAR) is concerned with abusive transactions, the code of conduct on taxation for banks is concerned with a wider range of tax structures that may result in the avoidance of tax. The document refers to a potentially abusive transaction as one where HMRC has issued a notice concerning a proposed counteraction of a tax advantage under the GAAR, and after considering the bank’s representations has referred the matter to the GAAR advisory panel. This would in most cases lead to the conclusion that the bank is not compliant with the code of practice, unless the bank self-assesses to counteract the tax advantage before the matter is referred to the GAAR advisory panel.