A Code of Practice on Taxation for Banks: HMRC Consultation

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10 July 2009

On 29 June 2009 Her Majesty's Revenue & Customs (HMRC) published its consultation document on the much awaited Code of Practice on taxation for banks, announced in the Chancellor's budget day speech. HMRC will be accepting comments on the draft document until 25 September 2009. While the proposed Code is only a page and a half long, the implications of it are potentially wide-ranging. 

Why a Code is needed, in the Government's view, is that banks are uniquely placed to pursue tax avoidance opportunities. The environment in which banks operate provides powerful incentives to seek competitive advantages through avoiding their own tax liabilities and those of key employees, promoting tax avoidance opportunities to customers and also facilitating, with their access to capital and range of contacts, tax avoidance schemes developed by others.

The key objective behind the Code is set out in the first of its four sections:

"The Government expects that banking groups… operating in the UK will comply with the spirit, as well as the letter, of tax law, discerning and following the intentions of Parliament.

The Code then goes on to explain how the Government expects this aim to be achieved, namely:

  • by adopting adequate governance at a sufficiently high level in the bank to control the types of transactions the bank enters into, and to ensure full compliance with the bank's tax obligations
  • not engaging in tax planning that aims to achieve tax results unintended by Parliament
  • by maintaining an open and transparent relationship with HMRC

These three key pillars of the Code are looked at briefly in what follows.


From the consultation document what is envisaged here by the Government is that each bank should formulate a written tax compliance policy for which the board or equivalent senior officers will be accountable. This written policy should contain a commitment to comply with tax obligations and maintain an open, professional and transparent relationship with HMRC.

There is evidently a desire to amplify the role and input of the banks' internal tax department in relation to the banks' business decision making. This should include putting adequate systems in place to ensure this input is fed into business decisions. The thinking appears to be that this should serve to encourage compliance with tax policy when it comes to decisions made in the business. 

Tax Planning

The Government and HMRC expect banks to 'discern' Parliament's intention in relevant tax legislation. The banks should avoid structuring transactions that relate to its own tax affairs in a way that will have tax results that are inconsistent with the "underlying economic consequences" of the transaction (unless the legislation is specifically designed to give a different tax result). 

In addition, the banks should avoid promoting transactions undertaken by other parties, such as customers, that aim to achieve a "tax result" that runs counter to the intention of Parliament. By implication the Code does not, however, prevent the banks being party to transactions that generate a tax advantage for others, so long as their role is merely facilitative.

Relationship between the Bank and HMRC

The draft Code provides that banking groups should maintain a 'transparent' and 'constructive' relationship with HMRC. Such a relationship should involve the banks disclosing significant uncertainties in tax matters and alerting HMRC in advance of proposed transactions that the bank believes may be contrary to the intentions of Parliament. It would also involve disclosing to HMRC (before the relevant returns are filed) any transactions or arrangements that have already taken place where the 'tax result' may run counter to the intentions of Parliament. This goes considerably further than the current tax disclosure regime.

The Code sets out a mutual relationship between the banks and HMRC that envisages issues being discussed and resolved quickly, with discussions often occurring in real time rather than in drawn out correspondence. 


The proposed Code is voluntary for banks. If a bank does not sign up (or if it signs up and fails to comply), the consultation document makes it clear that it can expect HMRC to devote greater resources to that bank to monitor compliance. The message is: adopt and comply with the Code, or expect greater scrutiny from HMRC. Clearly, there are also adverse publicity and reputational risks for banks that either do not sign up to the Code, or sign up and fail to comply. Banks that adopt the Code and fail to comply can also expect HMRC to raise the matter with the board and the senior non-executives of the bank. To the extent that non-compliance with the Code is found to be deliberate and the responsible officer of the bank who signed up to the Code is a member of a professional body, HMRC will also consider making a report to that body. 


It is accepted by HMRC and the Government that 'unacceptable tax avoidance' is difficult to define with any precision. What is proposed is a system requiring banks to take a reasonable view of 'the spirit of the law', which will involve, if need be, discussions with HMRC in advance of transactions if there is any doubt about what the spirit is. Banks will want to ensure that, in return for accepting the other aspects of the Code, they do get the benefit of resolving tax issues on a fast tracked, 'real time' basis rather than through drawn-out correspondence. It remains to be seen whether the pragmatic approach envisaged for tackling these difficult issues will have the desired effect, both for HMRC and the banks. 

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