BKM504700 - The Code commitments – tax planning: purpose tests

Tax legislation contains a number of purpose tests. These are often in anti-avoidance legislation. Typically, the relevant condition is whether avoidance of tax is a main purpose of a transaction or arrangement. Parliament intended that taxpayers should not enter into a transaction with a main purpose of utilising a particular piece of tax legislation to avoid tax. Where a transaction does have such a main purpose, then it will usually be Code Red. The transaction would, however, be Code Green if the bank had a reasonable belief that tax avoidance was not a main purpose of the transaction, or that the anti-avoidance legislation in question was not intended by Parliament to apply to it.

Whether a main purpose of a bank entering into a transaction is to achieve a reduction in tax due is a question of fact. Where a bank makes a pre-transaction Code approach and one or more purpose tests are in point, HMRC will accept the bank’s representations about its purpose as fact and give its view on whether the transaction is Code compliant based on the stated purpose.

Where a bank’s doubts on whether a transaction is contrary to the intentions of Parliament involve a purpose test, a Code approach will not provide the bank with certainty about the transaction’s compliance with the Code, as HMRC assumes that a bank’s analysis of its purpose is correct when dealing with these approaches. HMRC will consider a bank’s representations about its purpose critically and in any case where HMRC has concerns, it will go on to test the bank’s main purpose for entering into a transaction or arrangements, as described below.

HMRC will test a bank’s purpose for entering into a transaction, where this is relevant, as part of the process of checking the result of the transaction included in a return, or sooner if necessary. This is part of HMRC’s continuous assessment of the bank’s compliance with the Code, and applies to concerns identified from Code approaches and through HMRC’s usual compliance activity. If HMRC then found the transaction had a “bad” main purpose, HMRC’s view of the transaction would become Code Red unless the bank had a reasonable belief that tax avoidance was not a main purpose of the transaction, or that the anti-avoidance legislation in question was not intended by Parliament to apply to it.

If the bank self-assessed that the relevant anti-avoidance rule applied and made the appropriate tax adjustment, there will be no concern that the transaction achieved a tax result that is contrary to the intentions of Parliament, and it will not be necessary to test the purpose of the transaction, as that is indicated by the bank’s self-assessment. However, the CCM may wish to discuss with the bank whether the transaction itself is indicative of any inadequacies in the bank’s governance processes that need to be addressed.

On occasion, in order to test a bank’s compliance with the Code, it may be necessary for HMRC to test the bank’s purpose in entering into a transaction before it results in a tax advantage for the bank. For example, a bank may make an intra-group tax neutral transfer of an asset from a banking company to a non-banking company. At the time of the transfer, the bank had an expectation of subsequently selling the asset at a significant gain. A later third party disposal from the non-banking company would create a tax advantage as no bank surcharge would be payable on the gain. The surcharge has an anti-avoidance rule (TAAR) which would negate the tax saving if the main purpose of the intra group transfer was to avoid surcharge. For Code purposes, HMRC would test the purpose of the transfer to the non-banking company shortly after it was undertaken, rather than wait until the third party disposal, which is when the surcharge TAAR might have effect. If the main purpose or one of the main purposes for transferring the asset out of the banking company was to avoid paying surcharge on a future third party disposal, the transaction could be Code Red. This is because it is tax planning aiming to achieve a tax result contrary to the intentions of Parliament. If the bank had a reasonable belief that the surcharge TAAR would not be triggered on a future disposal, or that it did not have a main purpose of avoiding surcharge on a future disposal, then it would be Code Green.