BKM504500 - The Code commitments – tax planning: reasonable belief test

Both paragraphs 3.1 and 3.2 of the Code include a ‘reasonable belief test’.

• 3.1 Transactions should not be structured in a way that will have tax results for the bank that are inconsistent with the underlying economic consequences unless there exists specific legislation designed to give that result. In that case, the bank should reasonably believe that the transaction is structured in a way that gives a tax result for the bank which is not contrary to the intentions of Parliament
• 3.2 There should be no promotion of arrangements to other parties unless the bank reasonably believes that the tax result of those arrangements for the other parties is not contrary to the intentions of Parliament.

The test of reasonableness is no more than what a reasonable person with the relevant experience and training would believe given the facts and circumstances, having considered the proposed transaction in the round. It is a common sense test.

The bank may form a different reasonable belief from HMRC.

If, following a Code approach, (see BKM504550 for more information) HMRC believes that a tax result is contrary to the intentions of Parliament and that the planning has not become established practice, the CCM or equivalent will inform the bank about HMRC’s reasoning leading to the conclusion that it considers the potential transaction would be Code Red. References in this guidance to CCM or equivalent reflect the fact that the Code has been adopted by banks dealt with by Wealthy and Mid-sized Business Compliance (WMBC). These banks do not have a CCM.

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 then consider whether the bank’s belief about the intentions of Parliament or established practice is a reasonable one, and communicate its reasoned conclusions to the bank. If HMRC concludes that the bank’s belief is reasonable, then the transaction will be considered Code Green, and there would generally be no escalation of the issue under the Governance Protocol, unless the transaction forms part of a series of Code Red transactions (see BKM506200).

If HMRC concludes the bank did not have a reasonable belief that the tax result of the transaction is not contrary to the intentions of Parliament or that the planning has become established practice, the transaction will continue to be considered Code Red and the concern will be escalated under the Governance Protocol (see BKM506200).

This is a change in how HMRC considers a bank’s reasonable belief when responding to a Code approach. Previously, HMRC would assess whether a potential transaction was intended to give a tax result contrary to the intentions of Parliament and assess whether a bank had a reasonable belief that the result was not contrary to the intentions of Parliament at the same time. If HMRC concluded that the bank did have a reasonable belief, it would provide a Code Green assessment, which did not provide the bank with the opportunity to reconsider the transaction in light of the fact that HMRC viewed it as contrary to the intentions of Parliament.