BKM506300 - Governance protocol: when a case will be escalated to HMRC directors

This section provides guidance on the factors HMRC’s Responsible Officers (as defined below) will take into account in deciding whether a case should be escalated to directors.

Where HMRC has concerns that a bank is not complying with its commitments under the Code, HMRC’s primary aim is to achieve a change in behaviour. In some cases this will only be achieved following escalation to HMRC directors and their engagement at board level in the bank. If the bank doesn’t change its behaviour following this engagement, it may be found in breach of the Code after further escalation in line with the Protocol, and the bank could be named in the next annual report on the Code. In some cases a bank may be found in breach of the Code and may be named even though it has changed its behaviour.

The Protocol sets out what should happen at each stage of the escalation process. The first stage of escalation involves the responsible SCS in LB and BAI (Responsible Officers) making a judgement about whether a case should be escalated to HMRC director Level. This guidance sets out the approach HMRC will take in deciding whether a case should be escalated to directors.

The Protocol says that, if concerns remain after discussions between the CCM or equivalent and the bank, the case will be escalated to HMRC directors and the bank’s board. If, after this, HMRC’s concerns remain unresolved the case will be referred to TDRB. One exception from escalation is mentioned: normally a single transaction where the concern is about tax planning will not be escalated to the HMRC director unless it is part of an emerging pattern of behaviour or is a potential GAAR transaction. There is more information on this below.

As the objective of the Code is to bring about changes to the bank’s behaviour, HMRC consider it appropriate to take into account the bank’s current and future behaviour in deciding whether ‘concerns remain after discussions between the CCM or equivalent and the bank’.

If the concerns related to the bank’s governance or relationship with HMRC, HMRC’s view is that concerns will be allayed and escalation to directors will not be needed when the bank has made the changes to its governance or its relationship with HMRC that are needed to comply with its Code commitments.

HMRC’s view is that escalation to directors will be necessary when:

  • the bank has not made the changes to its governance or its relationship with HMRC that are needed to comply with its Code commitments; or
  • the CCM or equivalent and the Responsible Officers doubt that changes will endure without a director-level meeting (for example, this could be the case where there appear to have been multiple and significant failures by a bank to comply with its Code commitments, or a single apparent failure of particular significance)

If the concern related to a single tax planning transaction that HMRC concluded gave a tax result contrary to the intentions of Parliament, escalation to directors is only necessary where:

  • the bank has undertaken a potential GAAR transaction; or
  • there is an emerging pattern of the bank undertaking transactions (or promoting arrangements) which the Responsible Officers consider to have a tax result contrary to the intentions of Parliament, because this could indicate that the bank is not forming its views about the intentions of Parliament reasonably

In any other case where the concern related to a single tax planning transaction that HMRC concluded gave a tax result contrary to the intentions of Parliament, escalation to directors will not be needed where the bank demonstrates that it considered the transaction under adequate governance and reasonably concluded that it was not contrary to the intentions of Parliament or that the tax planning had become established practice.

There are a number of other circumstances involving a single planning transaction where HMRC considers escalation to directors is likely. These are where:

  • the bank has provided misleading information or otherwise concealed information either at the time the transaction was undertaken or in seeking to address concerns;
  • the bank has not demonstrated a change in attitude in relation to tax planning (it may have unwound the transaction or taken other steps to ensure it no longer gets a tax advantage, but this is to avoid a continuing dispute with HMRC rather than reflecting an acceptance that the transaction was not Code compliant);
  • a tax planning transaction went ahead and HMRC consider the bank not to have formed a reasonable belief that it was not contrary to the intentions of Parliament, unless the bank’s governance has been strengthened so that it will in future consider the intentions of Parliament in a reasonable manner; or
  • a bank wilfully ignored its existing governance processes in reaching a decision to go ahead with a tax planning transaction

If the concern relates to a bank’s tax obligations, escalation is likely where there are multiple or significant failures by a bank to comply with its tax obligations, indicating a failure to take reasonable care.

HMRC expects similar criteria to apply in deciding whether an issue should be escalated from director level to TDRB. If the TDRB determines that the bank has breached the Code, the matter will be escalated to the Commissioners – who, prior to making their determination, must refer to the Independent Reviewer to report on whether there has been a breach. Each of these is required to take any remedial action into account in deciding whether to name a bank that has breached the Code.