Corporate report

The Code of Practice on Taxation for Banks - Annual Report 2020

Published 17 December 2020

Introduction

The Code of Practice on Taxation for Banks (‘the Code’) helps to deliver HMRC’s objective of promoting compliance. It was introduced in 2009 to change the attitudes and behaviours of banks towards avoidance because of their unique position as potential users, promoters and funders of tax avoidance.

The Code describes the approach expected of banks with regard to governance, tax planning and engagement with HMRC. Banks operating in the UK that sign up to the Code commit to adopt good practices in relation to their own tax affairs, and not to promote tax avoidance by others. The Code sets out that banks should:

• adopt adequate governance to control the types of transactions they enter into
• not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament
• comply fully with all their tax obligations
• maintain a transparent relationship with HMRC

To strengthen the Code and provide greater transparency, legislation was introduced in Finance Act 2014, which requires HMRC to publish an annual report on how the Code is operating.

The annual report lists all banks that have, and all banks that have not, adopted the Code. Where HMRC has concerns over whether a bank has met its obligations under the Code, HMRC will take action to address these concerns in line with the published Governance Protocol (‘the Protocol’).

HMRC may name in the annual report banks that are found not to have complied with their Code commitments. A bank can only be named once all the steps set out in the Protocol have been completed.

A fuller history of the Code was set out in the introduction to the first annual report, which covered the period 5 December 2013 to 31 March 2015.

Operation of the Code in the year ended March 2020

Overview

This is the annual report on the operation of the Code, covering the period 1 April 2019 to 31 March 2020 (‘the Period’).

The names of the 324 banks that had adopted the Code as at 31 March 2020 are listed at Annex A. The list includes:

• 317 banks that had adopted the Code at 31 March 2019
• 7 banks which adopted in the year ended 31 March 2020

Four entities which were listed as adopters at 31 March 2019, are not in the Code population (as defined in Section 285(4) to (6), Finance Act 2014) at 31 March 2020, because they had ceased trading. In each case other entities in the same group remain adopters. Their names are listed at the bottom of Annex A and will not be included in later lists.

The 8 banks within the Code population that had not adopted the Code as at 31 March 2020 are listed at Annex B. Three of these banks have adopted the Code since 31 March 2020, and HMRC are in discussions with a further 2 about adoption.

This list is drawn from banks which HMRC’s records show to be within the charge to the bank levy (whether or not they have any liability for the Period), and from the list of banks and building societies published by the Prudential Regulatory Authority.

The Code continues to support improved behaviour across the banking sector. This is shown by:

• none of the banks which had adopted the Code by 31 March 2020 have been determined to be in breach of the Code during the Period
• banks that had adopted the Code did not make any disclosures under the Disclosure of Tax Avoidance Scheme regime in the Period
• all transactions reviewed during the Period as part of risk assessment were considered to be Code compliant.
• no initial concerns were escalated to director level or beyond during the Period (the Governance Protocol has 4 levels of escalation. The first level is to HMRC directors and board level of the bank. HMRC’s process for dealing with concerns is set out in detail in chapter 6 of the guidance)

HMRC published updated guidance on the Code alongside the annual report for the year ended 31 March 2019. This guidance updates the guidance previously published in 2016 and reflects the benefit of several years of experience of working with the Code, as well as input from extensive consultation with representative bodies and other stakeholders.

As such, the updated guidance provides more details of how HMRC operates the Code, with updates clarifying several terms, such as ‘meeting all tax obligations’, ‘genuine commercial activity’, ‘reasonable belief’, and providing new material on purpose tests.

The guidance also provides more information on how HMRC operates the Protocol, and there is information on how the Code interacts with the senior accounting officer regime, the penalties for enablers of defeated tax avoidance legislation, and the corporate offences for failing to prevent criminal facilitation of tax evasion.

HMRC’s compliance work with banks

The commitments banks have given under the Code require them to bring promptly to HMRC’s attention all material facts relevant to their own tax affairs and in relation to the tax consequences of products and services they promote to their customers.

They require the banks to maintain good internal controls over their tax affairs and to have clear lines of accountability within the banks for the implementation of their tax strategies.

In addition to ensuring that specific transactions are not designed to achieve tax results that are contrary to the intentions of Parliament, the Code also requires banks to have strong governance around tax and for HMRC and the banks to work together to encourage mutually open and transparent relationships.

HMRC’s Large Business directorate (LB) manages the tax compliance of the 70 largest banks as well as several smaller banks that are part of a large non-banking group. HMRC’s Wealthy & Mid-Sized Business Compliance directorate (WMBC) manages the tax compliance of other smaller banks.

LB carries out a Business Risk Review (BRR) annually for all non-low-risk large businesses. Where the business is low risk the Customer Compliance Manager (CCM) will usually carry out a formal BRR every 3 years and will continue to engage with the bank in real time as issues arise. The BRR enables HMRC’s CCMs to establish a good understanding of the tax risk profile in a particular business.

Since 2016 to 2017 banks have had a banking-specific BRR template, which ensures Code compliance is a central part of the BRR process. An enhanced BRR process, BRR+, was introduced during the Period. Businesses that were classified as non-low risk under the old process will now be classified as moderate, moderate-high or high risk.

LB continued to carry out BRRs annually for all businesses that are not classified as low risk. As the new process was still being rolled out during the Period, fifteen banks had their BRR carried out under the old BRR process, rather than under BRR+.

As part of the BRR process, the CCM reviews information from a range of sources, including information HMRC already holds in respect of a business and information in the public domain. For banks this process may include asking a bank to explain why it believes a transaction identified as part of the risk assessment process was Code-compliant.

Another way of gathering relevant information is through a review of the bank’s Code governance process by HMRC governance and audit specialists. CCMs use this information to help determine if the bank is complying with its Code commitments. CCMs and banks are expected to work together to address any gaps in knowledge before the next BRR.

The 4 Code categories on the BRR+ template are:

• the bank’s compliance with the Code has been reviewed and there are no current concerns
• the bank’s compliance with the Code is under review
• there are initial concerns over the bank’s compliance with its Code commitments (a bank will only be included in this category where Senior Civil Service grade staff in HMRC’s LB and Business, Assets & International directorates have given approval to discuss the concerns with the bank)
• there is an interim view that the bank has breached the Code (a bank will only be included in this category when the case has been considered by the Tax Disputes Resolution Board and the board has concluded that the bank has breached the Code)

Thirty-two of the 70 large banking groups dealt with in LB had BRRs during the Period, 17 using the BRR+ process. Twenty-seven of those identified the banks as compliant with their Code commitments, but in 5 cases HMRC still had to either carry out or complete its review of compliance with the Code at the end of the Period. These cases are therefore categorised as ‘under review’.

If HMRC discovers any issues that give rise to initial concerns, it will address them in accordance with the Protocol. Otherwise the banks will be classified as ‘compliant’ upon completion of the review. Of the 10 banks identified as ‘under review’ last year, 4 are still under review.

So far no specific concerns have been identified. Reviews were completed for the remainder, which were all found to be compliant with their Code commitments.

Smaller banks have no dedicated CCM and instead tax compliance is managed by the WMBC team. For these banks:

• during formal enquiries HMRC emphasises the Code obligation to ‘maintain a transparent relationship’ with HMRC in order to resolve matters quickly and efficiently
• outside the formal enquiry process HMRC raises Code compliance when meeting the representatives of smaller banks, in order to ensure they are aware of and meet their obligations under the Code. During the year HMRC has engaged with the smaller banks by conducting a webcast and building relationships with trade associations
• all the banks that the team have interacted with during the year have had an open and transparent relationship with HMRC. Where necessary, the team has reminded customers of their obligations under the Code to encourage collaborative working to achieve early resolution. No small bank has raised a Code issue with HMRC

If potential issues involving a bank are identified during compliance work on other customers, HMRC considers whether the available evidence gives rise to concerns about the bank’s compliance with its Code commitments. Where it does, HMRC will investigate the bank’s compliance with all aspects of the Code. Any suspected breaches will be dealt with robustly, in accordance with the Protocol.

Throughout the Period, several events were held to enhance HMRC staff’s understanding of how to review a bank’s compliance with the Code, both during their ongoing relationship with the bank and as part of the BRR process. These included formal training events and an in-depth workshop focussed on VAT issues, where staff considered the application of the Code to specific case studies.

During the Period, HMRC produced updated internal guidance for case teams to go alongside their training. This guidance sets out the internal administrative processes case teams need to undertake when dealing with various aspects of the Code, such as what to do when they receive a Code approach, how to handle routine monitoring of compliance with the Code, and how to deal with Code issues identified during compliance work.

HMRC’s response to Code approaches

Where a bank is unsure whether the tax result of a proposed transaction is contrary to the intentions of Parliament, it may discuss those plans with HMRC in advance (as set out in paragraph 4.2 of the Code). In the Period, HMRC responded to 7 pre-transaction Code approaches. After careful consideration 5 were agreed to be Code-compliant.

HMRC considered one of the transactions would have led to a tax result contrary to the intentions of Parliament in relation to the relevant tax law, and this transaction did not go ahead. HMRC did not provide a view on whether the remaining transaction would lead to a tax result contrary to the intentions of Parliament, as the uncertainty related to the application of a purpose test, which could not be tested before the transaction took place.

When transactions that were the subject of Code approaches are carried out, they remain subject to HMRC’s usual compliance processes, and if these transactions give rise to Code concerns, HMRC will address them in accordance with the Protocol.

HMRC has committed to respond to Code approaches within 28 days. Where the complexity of the issues raised means that more time may be needed, HMRC will indicate to the bank at the outset that a decision is likely to take longer.

If HMRC needs to ask for more information, the time taken by the bank to provide that information is excluded from the response time. This commitment is set out in the revised Code guidance, alongside an acknowledgement that where there is a commercial imperative to agree the Code position more quickly than this, HMRC will endeavour to meet this requirement.

Three of the 7 responses were issued within 28 days of the Code approach. Of the others, 2 required additional information to be provided by the customers and further analysis before HMRC could respond, and in 2 cases the response targets were not met because of delays by HMRC. As a result, HMRC has reviewed its relevant processes and provided further internal training to reduce the risk of delay.

Forward look

Role and operation of the Code

The roll out of the new enhanced BRR process, BRR+, will be completed during the next reporting period. It will keep Code compliance central to the BRR process for banks, with the continued use of a bank-specific template. Updated guidance was created for LB on how the BRR+ process will work for banks and was shared with case teams after the Period.

Due to the impact of Covid-19 there have been some changes to the BRR+ programme in 2020 to 2021. HMRC will continues to ensure that it prioritises the deployment of its resources where they have most impact.

Next annual report

The next annual report will cover the period 1 April 2020 to 31 March 2021 and will be published by 31 December 2021.