BKM504350 - The Code commitments – tax planning: are the tax consequences of the proposed transaction inconsistent with the underlying economic consequences?

The Code requires banks not to structure transactions to give a tax result inconsistent with the underlying economic consequences of the transactions, unless there is specific legislation designed to give that result and the bank reasonably believes that the transactions are structured to give a result that is not contrary to the intentions of Parliament.

Examples of transactions that may give results that are inconsistent with their underlying economic consequences include ones which result in:

  • more than one relief for the same expenditure without an equivalent inclusion of income;
  • the benefit of a tax credit for tax never suffered;
  • relief at more than the marginal rate for expenditure; or
  • no tax or tax below the relevant marginal rate suffered on trading profits, investment income or employment income.

Sometimes Parliament intends the tax result to be different from the economic consequences. An example of this is the enhanced deduction for research & development expenditure.

For this reason, it does not necessarily follow that a transaction will be Code Red just because the tax result differs from the underlying economic consequences. In this situation, HMRC will consider whether the legislation and/or supporting documents sanction this result.

Conversely if the tax result follows the economics of the transaction this would indicate that the transaction is likely to be Code compliant. But it would not be Code compliant if, for example, it sought to obtain an effective deduction for a type of expenditure where Parliament had legislated to deny a deduction.

All banks that adopt the Code commit to Part 1 of the Code. This means banks that have adopted the Code should not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament. Therefore, being consistent with economic outcomes is not the final test and the tax result of the transaction must always be consistent with the intentions of Parliament or have become established practice.