BKM507700 - HMRC operation of the Code: examples

Example 1 – Poor Internal Governance

A serious lack of internal governance that in HMRC’s opinion is not consistent with a bank’s Code commitments.

Scenario 1

Transactions are undertaken before Code compliance is considered and HMRC only become aware of issues post transaction. This could be because

  • the bank’s strategy for and governance of risk management for tax matters does not include all key personnel;
  • in large organisations, the key tax department/advisers are not sighted on all aspects of the business (such as wealth units or private banks).
Scenario 2

A bank approaches HMRC about a planned change involving PAYE. HMRC considers this to be Code Red and has already informed the bank that it considered previous transactions to be Code Red (were it not for the bank’s reasonable belief that they are not). A repeated difference of opinion could be an indication that the bank’s internal governance processes do not adequately reflect the principles of the Code and are not, therefore, deterring the bank from entering into transactions that achieve outcomes which are contrary to the intentions of Parliament. This would suggest that the bank’s strategy for and governance of risk management for taxation matters is not fully understood and operated within the bank.

In both scenarios HMRC would be concerned that the bank’s internal governance does not adequately support its obligations under the Code. HMRC’s actions in response to these concerns are all subject to the Governance Protocol. Initially the CCM or equivalent will raise these concerns with the bank at the earliest opportunity. If discussion between the CCM and the bank does not resolve the concerns, HMRC will seek to arrange a meeting between an HMRC Director and senior finance representatives from the bank.

If, following that meeting, there is still no indication that the bank is attempting to implement strategic or governance change, the case will be escalated to the Tax Disputes Resolution Board (TDRB). If the TDRB takes an interim view that the bank has breached the Code it will commission a report from an Independent Reviewer whose views will be taken into account when the Tax Commissioners consider the bank for naming as non-compliant in the next annual report.

Example 2 – A one off transaction counteracted under the GAAR

A bank implements a transaction to achieve a tax advantage on its own account, and also markets the product to a number of clients. The bank does not approach HMRC under the Code pre-transaction but does submit a DOTAS disclosure in respect of the transaction(s). The GAAR panel decides that entering the arrangements was not a reasonable course of action and following this opinion, the designated officer in HMRC sends a notice of proposed counteraction to the bank.

Once the GAAR panel has reached agreement that the arrangements are not a reasonable course of action and the designated officer has sent a notice of proposed counteraction, then the action by the bank in entering into and promoting this transaction is a breach of the Code.

As this is an automatic breach of the Code, HMRC will immediately instruct the Independent Reviewer to consider whether the bank should be named in the next annual report. The Commissioners will then decide whether to name the bank in line with the Governance Protocol.

Example 3 – Relationship between bank and HMRC

A bank may have adopted the Code but not have an open and transparent relationship with HMRC.

During risk assessment the case team identified a transaction with significant tax at risk which they considered may give a tax result that is contrary to the intentions of Parliament.

The case team opens an enquiry and asks questions about the transaction and how the bank considered the Code in relation to this transaction. The bank is very slow to respond and unwilling to agree timelines for delivery of information. When information is provided this is not sufficient for HMRC to understand the transaction.

During the course of the long-running enquiry, the case team discover the bank had considered the application of the Code to the transaction and were unsure whether the tax result was contrary to the intentions of Parliament. The bank had not brought this to HMRC’s attention.

HMRC determined that the tax result was not contrary to the intentions of Parliament. However, this scenario gives rise to concerns about the bank’s commitment to the Code for the following reasons:

  • The bank only disclosed this significant uncertainty to HMRC after prompting and even then failed to disclose it fully, despite considering the application of the Code and being uncertain about its application.
  • The bank did not engage with HMRC in a cooperative, supportive and professional manner.
  • The bank did not work collaboratively with HMRC.
  • The bank failed to work with HMRC to agree reasonable timelines.

In these circumstances the CCM or equivalent will raise the concerns with the bank at the earliest opportunity, once this action has been approved at Responsible Officer level.

If discussion between the CCM and the bank does not resolve the concerns, HMRC will seek to arrange a meeting between an HMRC director and senior representatives from the bank.

If there is still no indication that the bank is attempting to implement strategic or governance change including a commitment to an open and transparent relationship with HMRC, further action will be taken under the Governance Protocol with a view to determine if the bank is not compliant and if it is whether it should be named in the next annual report.