BKM504150 - The Code commitments – tax planning: background

Transactions are acceptable under the Code if it is reasonable to believe the outcome or UK tax result is not contrary to what Parliament intended. Understanding and being able to discern the intentions of Parliament is therefore critical to compliance with the Code.

The Code requires banks to follow the spirit of the law as well as the letter of the law. Although HMRC believes that a taxpayer follows the spirit of the law by understanding how Parliament intended the law to apply and abiding with this intention, it is nonetheless useful to understand why the Code was introduced and the history of this distinction.

In the consultation document issued on 29 June 2009, the Financial Secretary to the Treasury stated that it was “clear that some banks have been involved in tax avoidance that goes well beyond reasonable tax planning” and that the Code was intended to change the behaviour of banks and their attitudes towards tax avoidance.

The consultation document attempted to identify common traits of tax avoidance schemes. These included “exploiting loopholes in legislation, artificially creating the conditions for tax relief, or using different parts of the tax code together to get a result that was never intended by the legislation”. The tax advantage often depended upon applying a literal construction of the legislation and using particular words and ambiguity in specific provisions to achieve a tax effect that was incongruous with the broader principles of that part of the legislation. These transactions were often designed mainly to exploit these weaknesses and had little commercial consequence.

Since 2009 the courts have increasingly adopted a purposive approach to statutory interpretation and have often ruled against schemes that attempt to obtain a tax outcome that was clearly not intended by Parliament. There is a growing body of legal rulings that clarify how to assess the intentions of Parliament.