BKM504400 - The Code commitments – tax planning: the Legislation

HMRC will consider what the relevant legislative provisions were intended to achieve and compare this with the transaction, both in terms of the steps involved and the end tax result.

To do this HMRC will consider how the relevant provisions interact with one another and what their function is within that chapter or part.

For instance, anti-avoidance legislation is normally introduced to counter or prevent a particular tax outcome. Transactions are likely to be contrary to the intentions of Parliament where they exploit a weakness or ambiguity in the precise wording of the anti-avoidance rule and in doing so obtain the same tax result that the rule was introduced to counter.

Likewise, transactions that use an anti-avoidance rule to obtain a tax advantage may be contrary to the intentions of Parliament. For example, an anti-avoidance rule might create a tax charge and allow a corresponding tax deduction to ensure a symmetrical treatment. If a taxpayer entered into arrangements in order to obtain this tax deduction, then this is likely to be Code Red.

In contrast an election is a choice given to the taxpayer by Parliament and a transaction will not be contrary to the Code if the taxpayer has merely taken that choice, even if the situation is different from what was initially envisaged when the legislation was enacted.

The wording of the legislation alone may not point clearly to the intentions of Parliament so HMRC should consider the policy statements relevant to the legislation. These include:

  • Written Ministerial Statements;
  • Ministerial Speeches (including Hansard);
  • Consultation Response Documents;
  • Technical Notes;
  • Explanatory Notes; and
  • Explanatory Memoranda

Other documents not taken into consideration by Parliament, for example HMRC guidance, should not be used to determine whether a transaction is Code compliant (although see BKM504450 on established practice). This is because the government cannot make laws without Parliament’s agreement.

If the intentions of Parliament are not clear from the legislation and the supporting documents, then the transaction defaults to being Code Green even if it gives, or potentially gives, a counter-intuitive tax result.