On 29 June, 2009, HM Revenue & Customs (“HMRC”) in the UK published a draft code of practice for the banking sector (the “Code”). This was expected, following the 2009 Budget.

The stated aim of the Code is to “change behaviours and attitudes towards tax avoidance in the banking sector [and] to encourage banks to comply with both the letter and the spirit of the law”. A senior officer, preferably at board level, of each bank operating in the UK would be expected to sign the Code.

The UK Government believes that banks are uniquely placed in relation to tax avoidance, in that they:

  • can seek to avoid their own tax liabilities;
  • provide financial services to customers, many of which services are sensitive to tax and some of which can be used for tax avoidance; and
  • have access to large amounts of capital which they can use to facilitate avoidance schemes designed and implemented by others.

The Code, in essence, would impose a higher standard of behaviour in relation to potential or perceived tax avoidance than is applied to other UK taxpayers. It will require those operating in this sector to discern the "spirit of the law", instead of simply following the statute and case law applicable to the transaction. In cases of doubt this will require the relevant bank to enter into transparent discussions with HMRC in advance of the transaction, or risk penalties, including reports being made to any professional body regulating the director who has signed the Code for the bank concerned.

Comments on the Code are invited before 25 September 2009.

The draft Code is stated to draw on two themes in the Government's approach to encourage large businesses to develop their relationships with HMRC. These are:

  • the benefits of transparency; and
  • the importance of good governance and senior-level accountability for tax matters.

After billions of pounds of support for banks from the public purse, and recent controversy over the structured finance practices of high profile UK banking market participants, it would be unrealistic to expect or demand that the tax environment in which UK banks operate remained unchanged. However, interested parties should actively and constructively participate in the consultation process relating to the proposed Code, in order to assist in developing a more balanced document. As it stands, the Code suggests that any uncertainties encountered by banks adopting it be dealt with by discussion with HMRC, but there is no explanation as to how differences of opinion should then be dealt with. If the answer is that in such discussions the "customer" is always wrong, with no method of appeal, serious questions will have to be asked about the legitimacy of the tax authorities seeking an apparently quasi-judicial role in the tax system. This is especially so given that it seems that no aspect of the Code will be considered by Parliament (which it seems is simply to be provided with information on compliance with it). The fact that there is no legal sanction arising from non-compliance with the Code does not lessen the significance of this apparent shift of power. Although the Code is styled as voluntary, the banking sector will have no real choice but to comply.

The following are the key points as proposed by HMRC:


The Code should be adopted by all banks operating in the UK, and by any similar organisations undertaking banking activities. The Code should be signed by a senior officer of the organisation, preferably at board level. These businesses and other institutions should apply the Code in all their dealings, throughout their commercial operations, including in their subsidiaries and other vehicles.


Banks should have a documented strategy and governance process for taxation matters encompassed within a formal compliance policy. This policy should include a documented strategy to comply with tax obligations and to maintain an open, professional and transparent relationship with HMRC. The responsibility and accountability for the governance process will rest with boards of directors or equivalent senior officers in the bank.

Tax Planning

According to the Code, “…..exploiting loopholes in the legislation, or combining the use of parts of the tax code that were never intended to be used together, go beyond what is acceptable.”.

The Code focuses on three situations:

  • where the bank is a principal participating in a transaction
  • where the bank is not a principal - this covers all situations where the business is providing a facilitation service to customers without participating in transactions; and
  • in relation to the bank as an employer.

In the first situation, the Code expects the tax results to be consistent with the underlying economic consequences - both for the business itself and for any counterparty.

In the second situation, when providing a service to customers, the Code requires that the business will not promote arrangements that would give a result contrary to the intentions of Parliament. This will include undertaking not to promote avoidance schemes, whether or not such schemes would fall within the existing tax avoidance disclosure provisions. This would not prevent banks facilitating transactions as long as they are not promoting them.

In the third situation, the Code reflects Government policy that all employers and employees pay the “proper” amount of tax and National Insurance Contributions (NICs) on the rewards of employment.

The Code sets out some common features, or "signposts", which HMRC consider to be indicators of the types of transaction that are unacceptable. These reportedly include:

  • transactions that have little or no economic substance;
  • transactions bearing little or no pre-tax profit which rely on anticipated tax reduction for significant post-tax profit;
  • transactions that rely on a mismatch such as: between legal form or the accounting treatment and the economic substance; or between the tax treatment for different parties or entities; or between the tax treatment in different jurisdictions;
  • transactions involving contrived, artificial, transitory, pre-ordained or commercially unnecessary steps. For example, a combination of options designed to generate a tax loss without any economic loss; and
  • transactions or arrangements where income, gains, expenditure or losses are not proportionate to the economic activity taking place or the value added in the UK. This can involve the transfer of ownership of an income stream from a company in the UK to an associated offshore vehicle in a low-tax or no-tax jurisdiction.

The Government acknowledges that there are some situations where UK tax law departs from the underlying economics – in this case, the Code requires that the tax results should not be contrary to the intentions of Parliament. Where the bank cannot easily discern the intentions of Parliament, businesses should discuss their proposed transactions with HMRC to discuss the proposed transaction. The decision on whether or how to proceed with the transaction will remain with the bank, which should be prepared to explain its decision.

Relationship with HMRC

Banks are to be encouraged to discuss transactions with their Client Relationship Manager (“CRM”) at HMRC.

Key aspects of the type of relationship that HMRC will require are that:

  • the business fully discloses issues that HMRC would want to know about and might want to discuss;
  • both the business and HMRC focus on significant issues, using resources where there is risk;
  • discussions often occur in real time;
  • the tone of the relationship is positive and professional; and
  • the business and HMRC work together to resolve any issues quickly.

Implementation and Enforcement

During the consultation period, HMRC intend to meet with banks individually to discuss the Code. This dialogue will reportedly continue after the Code has been adopted and HMRC states it will use the Code as an integral part of its risk assessment and relationship management with each of the banks.

The CRM for each bank will carry out an annual risk review. When conducting this review the CRM will examine whether the bank has complied with the Code. The CRM will discuss with the bank the issues that arose and how they were resolved. In particular the CRM will wish to test whether any significant uncertainties were raised with HMRC at the appropriate time so that the CRM can be satisfied that the required degree of transparency and disclosure is being applied. Those not adopting the Code can expect greater scrutiny from HMRC.

Where banks do not comply, or where HMRC has concerns about compliance with the Code, HMRC will raise the issue with the board of the bank. Where appropriate, HMRC will raise their concerns with the senior non-executive. Where non-compliance is found to be deliberate and the officer of the bank who signed up to the Code is a member of a professional body, HMRC will consider making a report to that body.

If inappropriate behaviour by banks persists, the Government will consider further steps to reinforce the Code. This could include, for example:

  • requiring banks to disclose in their accounts the extent to which they have complied with the Code; and /or
  • requiring an audit of a bank's compliance with the Code.

The full version of the Code itself is set out in the Annex to this memorandum.