BKM507200 - HMRC operation of the code: Code Red decision

If HMRC decides that a transaction is Code Red, then the CCM or equivalent will communicate this to the bank at the earliest opportunity providing details of HMRC’s reasoning. If after considering HMRC’s reasoning the bank still considers the transaction to be Code Green, HMRC will usually be willing to enter into further discussion with the bank around forming a common view of the intentions of Parliament or whether planning has become established practice. This will not be possible in all cases, and there will be instances where the bank and HMRC continue to disagree.

If the bank and HMRC continue to disagree about the intentions of Parliament or whether planning has become established practice, and the bank wishes to continue with the transaction, it will then be given an opportunity to make written representations on why it still believes the transaction was Code Green. This should take into account the bank’s discussions with HMRC, and should explain how the bank came to its conclusion.

HMRC will not tell the bank not to carry out the transaction; that will always remain a business decision for the bank. Instead, the CCM or equivalent will try to establish through discussion whether the bank remains committed to the Code principles and whether the bank’s governance processes are compliant with its Code commitments. The bank will have the opportunity to make its representations which HMRC will take into account.

Based on these discussions, the Responsible Officers (explained in BKM506200) will decide whether to escalate the decision in line with the Governance Protocol. See BKM506300 for the factors the Responsible Officers will take into account in deciding whether to escalate a single planning transaction.

If the bank decides to proceed with a transaction, despite the Code Red decision, HMRC will first form a view about the bank’s reasonable belief. If the Responsible Officers consider the bank did have a reasonable belief that the transaction is not contrary to the intentions of Parliament or has become established practice as defined in BKM504450, then it will not normally be escalated to the HMRC director unless it is part of an emerging pattern of behaviour or is a potential GAAR transaction.

However, if it appears the bank had no such reasonable belief, the bank should be aware that this automatically disqualifies it from being classified as a Low Risk business in HMRC’s Business Risk Review, and the transaction is likely to be escalated to HMRC director level.

The Governance Protocol explains in detail the next stages in the escalation process. The bank will be given the opportunity to make representations at each stage of the process and this evidence will be taken into account throughout. The HMRC Commissioners are required to take into consideration the opinion of an Independent Reviewer before they decide whether to name the bank in the Annual Report. While the final decision rests with the HMRC Commissioners there are only very limited circumstances in which they can deviate from the Independent Reviewer’s decision, which is explained in more detail in BKM506700.

Regardless of whether the bank had a reasonable belief, if HMRC believes a transaction obtains a tax result contrary to the intentions of Parliament it may approach the Treasury, and if appropriate Ministers, with a view to potentially changing the law. The government has a track record of acting to close avoidance opportunities of which it becomes aware, often announcing proposals to change the law with immediate effect.