Corporate report

The Code of Practice on Taxation for Banks Annual Report 2021

Published 9 December 2021

1. Introduction

The Code of Practice on Taxation for Banks (‘the Code’) helps to deliver HMRC’s objective of promoting compliance. It was introduced in 2009 to change the attitudes and behaviours of banks towards avoidance because of their unique position as potential users, promoters and funders of tax avoidance.

The Code describes the approach expected of banks with regard to governance, tax planning and engagement with HMRC. Banks operating in the UK that sign up to the Code commit to adopt good practices in relation to their own tax affairs, and not to promote tax avoidance by others. The Code sets out that banks should:

• adopt adequate governance to control the types of transactions they enter into
• not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament
• comply fully with all their tax obligations
• maintain a transparent relationship with HM Revenue and Customs (HMRC)

To strengthen the Code and provide greater transparency, legislation was introduced in Finance Act 2014, which requires HMRC to publish an annual report on how the Code is operating. The annual report lists all banks that have, and all banks that have not, adopted the Code. Where HMRC has concerns over whether a bank has met its obligations under the Code, HMRC will take action to address these concerns in line with the published Governance Protocol (‘the Protocol’). HMRC may name in the annual report banks that are found not to have complied with their Code commitments. A bank can only be named once all the steps set out in the Protocol have been completed.

A fuller history of the Code was set out in the introduction to the first annual report, which covered the period 5 December 2013 to 31 March 2015.

2. Operation of the Code in the year ended March 2021

Overview

This is the annual report on the operation of the Code, covering the period 1 April 2020 to 31 March 2021 (‘the Period’).

The names of the 324 banks that had adopted the Code as at 31 March 2021 are listed at Annex A. The list includes:

• 316 banks that had adopted the Code at 31 March 2020
• 8 banks which adopted in the year ended 31 March 2021

Eight entities which were listed as adopters at 31 March 2020 were not in the Code population^{[footnote 1]} at 31 March 2021, because they had ceased all banking activity.

The 5 banks within the Code population that had not adopted the Code as at 31 March 2021 are listed at Annex B. Two of these banks have adopted the Code since 31 March 2021. This list is drawn from banks which records show to be within the charge to the bank levy (whether or not they have any liability for the Period), and from the list of banks and building societies published by the Prudential Regulatory Authority.

The Code continues to support improved behaviour across the banking sector.

None of the banks which had adopted the Code by 31 March 2021 have been determined to be in breach of the Code during the Period.

Banks that had adopted the Code did not make any disclosures under the Disclosure of Tax Avoidance Scheme regime in the Period.

All transactions reviewed during the Period as part of risk assessment were considered to be Code compliant.

No initial concerns were escalated to director level or beyond during the Period ^{[footnote 2]}.

You can read HMRC’s guidance on the Code on GOV.UK.

HMRC’s compliance work with banks

There has been some impact from COVID 19 on compliance work carried out with banks in 2020 to 2021. HMRC has taken a responsive approach to compliance activity during this time to help customers navigate the exceptional circumstances of COVID 19. In some cases it was appropriate to temporarily pause work and defer Business Risk Reviews (now undertaken through the enhanced BRR+ process) to enable customers to focus on more urgent priorities.

HMRC’s Large Business directorate (LB) manages the tax compliance of the 70 largest banks as well as several smaller banks that are part of large non-banking groups. HMRC’s Wealthy & Mid-Sized Business Compliance directorate (WMBC) manages the tax compliance of smaller banks.

LB usually carries out a BRR+ annually for all large businesses that are not low risk. Where the business is low risk the Customer Compliance Manager (CCM) will usually carry out a formal BRR+ every 3 years. This enables HMRC’s CCMs to establish a good understanding of the tax risk profile in a particular business. Twenty-seven of the 70 large banking groups dealt with in LB had BRR+s during the Period.

As part of the BRR+ process, the CCM reviews information from a range of sources, including information HMRC already holds in respect of a business and information in the public domain. For banks this process may include asking a bank to explain why it believes a transaction identified as part of the risk assessment process was Code-compliant. Another way of gathering relevant information is through a review of the bank’s Code governance process by HMRC governance and audit specialists. CCMs use this information to help determine if the bank is complying with its Code commitments. CCMs and banks are expected to work together to address any gaps in knowledge before the next BRR+.

The 4 Code categories on the BRR+ template are:

• the bank’s compliance with the Code has been reviewed and there are no current concerns
• the bank’s compliance with the Code is under review
• there are initial concerns over the bank’s compliance with its Code commitments ^{[footnote 3]}
• there is an interim view that the bank has breached the Code ^{[footnote 4]}

In 5 cases HMRC’s review of banks’ compliance with the Code was ongoing at the end of the Period. These cases are therefore categorised as ‘under review’. If HMRC discovers any issues that give rise to initial concerns, it will address them in accordance with the Protocol. Otherwise these banks will be classified as ‘compliant’ upon completion of the review

LB customer teams may also identify concerns about a bank’s governance, its approach to tax planning or the transparency of its relationship with HMRC during enquiries or other interactions through the year. If so, these are addressed in accordance with the Protocol.

Smaller banks have no dedicated CCM and instead tax compliance is managed by the WMBC team. For these banks:

• during formal enquiries HMRC emphasises the Code obligation to ‘maintain a transparent relationship’ with HMRC in order to resolve matters quickly and efficiently
• outside the formal enquiry process HMRC raises Code compliance when meeting the representatives of smaller banks, in order to ensure they are aware of and meet their obligations under the Code. During the year HMRC has engaged with the smaller banks by conducting a webcast and building relationships with trade associations.
• generally the banks that the team have interacted with during the year have had an open and transparent relationship with HMRC. Where necessary, the team has reminded customers of their obligations under the Code to encourage collaborative working to achieve early resolution. No smaller bank has made a Code approach to HMRC during the year

If potential issues involving a bank are identified during compliance work on other customers, HMRC considers whether the available evidence gives rise to concerns about the bank’s compliance with its Code commitments. Where it does, HMRC will investigate the bank’s compliance with all aspects of the Code. Any suspected breaches will be dealt with robustly, in accordance with the Protocol.

Throughout the Period, several events were held to refresh existing HMRC staff’s understanding and train new staff on how to review a bank’s compliance with the Code, both during their ongoing relationship with the bank and as part of the BRR+ process. These included formal training events and an in-depth workshop focussed on VAT issues, where staff considered the application of the Code to specific case studies.

HMRC’s response to Code approaches

Where a bank is unsure whether the tax result of a proposed transaction is contrary to the intentions of Parliament, it may discuss those plans with HMRC in advance (as set out in paragraph 4.2 of the Code). In the Period, HMRC responded to one pre-transaction Code approach, which was agreed to be Code-compliant. This response was issued within 28 days of the Code approach.

The low level of Code approaches continues a trend from previous years. We believe that there are a range of factors that have led to fewer approaches by banks, such as a better understanding of the Code, a continuing evolution in attitudes to tax avoidance and boundary pushing, and changing commercial pressures in the light of EU Exit. It is also possible that COVID 19 has impacted the number of approaches.

1. As defined in section 285(4) to (6), Finance Act 2014. ↩

2. The Governance Protocol has 4 levels of escalation. The first level of escalation is to directors of HMRC and board level of the bank. HMRC’s process for dealing with concerns is set out in detail in chapter 6 of the guidance. ↩

3. A bank will only be included in this category where Senior Civil Service grade staff in HMRC’s Large Business and Business, Assets and International directorates have given approval to discuss the concerns with the bank. ↩

4. A bank will only be included in this category when the case has been considered by the Tax Disputes Resolution Board and the board has concluded that the bank has breached the Code. ↩