BKM504250 - The Code commitments – tax planning: supporting genuine commercial activity

The Code requires banks not to engage in tax planning that does not support genuine commercial activity. The consultation document published on 29 June 2009 said “tax planning in support of commercial transactions is normal and appropriate. But the government does not condone tax planning which goes beyond support for genuine commercial activities.”

Before the introduction of the Code, there was a concern that some banks might be entering into transactions that had little or no commercial consequence, and were put in place purely to obtain a tax advantage.

Genuine commercial activity will often have been entered into with a view to a realisation of a pre-tax profit which reflects the assets and staff effort employed. In some cases genuine commercial activity might be targeted at the minimisation of an expected loss. There can be other genuine commercial reasons for entering into a transaction, beyond pre-tax profit or loss minimisation. As banks are subject to regulation, commercial activity may include, but is not limited to, things such as capital optimisation, complying with liquidity and balance sheet constraints, reducing funding costs and market and political risks. The question of whether there is genuine commercial activity will be determined by reference to all relevant facts, including the regulatory framework within which banks operate.

In order to make these assessments, it may be necessary to consider the position both at the individual entity level and across the group as a whole, taking account of the reality that the company is a member of a group and may be used by the group’s management to carry out a group-level commercial purpose. A transaction does not necessarily represent genuine commercial activity simply because it uses financial instruments etc. which are used in the normal course of the business.

If the bank would not enter into a transaction but for it creating a tax advantage, then it is likely that the planning does not support genuine commercial activity. Further, while banks might be expected to carry out commercial transactions in a tax efficient manner, if a bank would not structure a transaction in the way it has done other than to create a tax advantage, it will be necessary to consider whether the planning merely supports genuine commercial activity or has a separate objective of creating a tax advantage.

Where banks are looking to unwind transactions that have previously been entered into, either as part of an avoidance scheme prior to adopting the Code, or as part of normal commercial activity, and there is a tax saving as a result of the unwind, HMRC will consider whether the unwind itself supports genuine commercial activity.