BKM501100 - Introduction: background to the Code of Practice on Taxation for Banks

The Code of Practice on Taxation for Banks (“the Code”) is a voluntary undertaking that requires participants to maintain good standards of governance and behaviour in their approach to taxation.

The Code was introduced in 2009 and applies to a banking or building society group, banks in non-banking groups and single banking or building society entities. The Code uses “bank” as a collective term for these groups or entities (see BKM502000).

At the time the Code was introduced, some businesses were involved in tax avoidance that went well beyond reasonable tax planning. Many schemes worked by targeting loopholes in the legislation or forcing different parts of the tax code together in a way that was not intended by Parliament. Others relied on complex financing arrangements that sought to create a loss for tax purposes that was far greater than the true commercial or economic cost to the borrower.

Previously, governments had attempted to counteract avoidance by changing the law to stop individual schemes. Sometimes this worked, but often the avoidance industry simply altered the scheme to work around the new law.

The Code is one element of the government’s anti-avoidance strategy and when introduced was designed to change the attitudes and behaviours of banks towards avoidance given their unique position as potential users, promoters and facilitators of tax avoidance.

The Code describes the approach expected of banks with regard to governance, tax planning and engagement with HM Revenue & Customs (HMRC). It encourages banks operating in the UK to adopt best practice in relation to their own UK tax affairs, and not to promote UK tax avoidance by others.

By early 2013, most banks had adopted the Code and HMRC had seen a positive response by banks in relation to their tax planning and transparency.

Although HMRC believed the Code was generally operating well, it lacked public transparency. There were also no obvious downsides for banks from not adopting the Code and no codified consequences for non-compliance with a bank’s Code commitments.

As announced at Budget 2013, legislation was introduced in FA14/S285-289 requiring HMRC to publish an annual report, beginning in 2015, on the operation of the Code. This strengthened the Code, and ensures its long-term effectiveness, by providing a mechanism for the naming of non-compliant banks and by providing full transparency around which banks have adopted the Code.

Where HMRC has concerns over whether a bank has met its obligations under the Code, it will take action to address these concerns in line with the escalation process detailed in the published Governance Protocol (“the Protocol”). HMRC can only name a bank as having breached the Code when it has completed all the steps set out in the Protocol.

Following consultation, HMRC invited all banks to unconditionally confirm or reconfirm their commitment to the obligations set out in the Code before Autumn Statement 2013. The names of the 264 banks which did so were published at that time.