Tax Research UK

The predictable response to the new Banking Code has arrived. Accountancy Age has reported:

Michael Wistow, head of tax at City law firm Berwin Leighton Paisner, said that the code would make the UK ‘a less attractive place to do business, which cannot be helpful in these most difficult times and will further damage the UK as a major financial centre.’

The code stipulates that banks be expected to follow the ’spirit of the law’ as defined by HM Revenue and Customs rather than legal precedent.

‘All taxpayers, including banks, should be able to rely on the courts and Parliament alone,’ he said.

Of course: the law is supreme. But all the Code asks banks to do is comply with it. Now what’s the problem with that?

Richard Murphy Banking, Code of Conduct

The Chartered Institute of Tax has issued a press release about the new Tax Code of Conduct for Banks, saying they welcome it, and:

The CIOT’s initial view is that much of the code reflects good governance and the need for an open and transparent relationship with HMRC which we support.  However, the CIOT would prefer that the process of making tax law is improved so that it is clear to all what the intention of Parliament was and so codes seeking to establish what the intention might be are unnecessary.

Peter Fanning, CIOT Chief Executive, said: "Defining the purpose of established law can be very difficult.  The quantity of HMRC guidance is ample proof of this.  Even in law, not everyone agrees.  The challenge is to decide who decides what the ‘spirit’ of the law is and how they decide it. If future tax law is clear then following its ‘spirit’ will be much easier but establishing the ‘spirit’ of previous complex legislation will be a challenge.”

This is predictable and simply not helpful. As a matter of fact i also challenge their opinion: I think the intent of parliament can almost always be discerned, as is also HMRC’s view.

But the sorry fact is that this problem could have been avoided if HMRC had said the Code demanded tax compliance. this can be defined as:

Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. 

It’s always much better to define a positive goal than to expect a negative to be avoided. It seems an elementary mistake as a result to create a Code to defeat tax avoidance rather than to promote tax compliance as a consequence.

I hope it’s not too late to change this. I will be contributing to the consultation.

Richard Murphy Code of Conduct, Tax compliance

The good news about the government’s new Tax Code of Conduct is that it exists. It would be churlish not to recognise that.

But, that said, it really does not go far enough. In keeping with the government’s lack of willing to tackle the banking industry it tackles the issue and then fails to address it.

The issue is that:

The Government believes that, in the light of the significant taxpayer support provided to stabilise the banking system, taxpayers are entitled to expect that banks, important taxpayers in their own right, and their customers pay their fair share of tax.

The failure is a simple one: if the government really meant to tackle this issue it should have backed any Code of Conduct with statutory powers to enforce it. In this case that would require a General Anti-Avoidance Principle (GAntiP), an issue I explore in more depth here. In essence a GAntiP says that if a step is added to a transaction with the sole or principal aim of securing a tax advantage (which is defined as a saving in tax) then that step in the transaction is ignored for tax purposes. This is that the new Code of Conduct also seeks to say: why not back it with law?

The omission from the Code is the obligation it should have put on the government to make it easier to determine what the ‘spirit of the law’ and the ‘intention of parliament’ is. Again, I have written extensively on both issues, most accessibly here. The government has a duty to publish purposive legislation, and it must empower courts to interpret the law of tax purposively. If not we will always end up with the courts undermining any Code – a fate that an attempt at a general anti-avoidance rule (note, rule not principle – they are not the same) has suffered in Canada.

And then there are three oversights: the first is that this Code does not extend to the advisers and auditors of banks. That seems a serious error: these parties should be covered with the obligation to ensure their clients comply or to decline to act. Second, it’s not clear if the Code extends outride the UK, when clearly it must if tax haven activity is to be included. Third, there is no requirement on the government to ensure its own activities are also compliant. That would mean it would be banned from using artificial structures such as orphan entities, too commonplace in PFI for example, or from artificially promoting tax competition. Reciprocity is  key to the acceptance of voluntary obligations, and I am not seeing it here.

All of which leaves me grateful that this will be reviewed in twelve months, and worried that it will be the Tories who review it, which gives more than enough reason for going the extra mile now.

Richard Murphy Accounting, Banking, Code of Conduct, Tax avoidance

This is the Tax Code of Conduct for Banks on which the government is now consulting:

OVERVIEW

1.  The Government expects that banking groups, their subsidiaries, and their branches operating in the UK, will comply with the spirit, as well as the letter, of tax law, discerning and following the intentions of Parliament.

1.1  This means that banks should:

•   adopt adequate governance to control the types of transactions they enter into;

•   not undertake tax planning that aims to achieve a tax result that is contrary to the intentions of Parliament;

•   comply fully with all their tax obligations; and

•   maintain a transparent relationship with HM Revenue & Customs (HMRC).

GOVERNANCE

2.The bank should have a documented strategy and governance process for taxation matters encompassed within a formal policy. Accountability for this policy should rest with the UK board of directors or, for foreign banks, a senior accountable person in the UK.

2.1  This policy should include a commitment to comply with tax obligations and to maintain an open, professional, and transparent relationship with HMRC.

2.2  Appropriate processes should be maintained, by use of product approval committees or other means, to ensure the tax policy is taken into account in business decision-making. The bank’s tax department should play a critical role and its opinion should not be ignored by business units. There may be a documented appeals process to senior management for occasions when the tax department and business unit disagree. 

TAX PLANNING

3.The bank should not engage in tax planning other than that which supports genuine commercial activity.  

3.1  Where the bank is principal, transactions should not be structured in a way that will have tax results 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 which is not contrary to the intentions of Parliament.  

3.2  Where the bank is not principal, but is providing or facilitating transactions undertaken by other parties, there should be no promotion of arrangements unless the bank reasonably believes that the tax result of those arrangements is not contrary to the intentions of Parliament.

3.3  Remuneration packages for bank employees, including senior executives, should be structured so that the proper amounts of tax and national insurance contributions are paid on the rewards of employment.

RELATIONSHIP BETWEEN THE BANK AND HMRC

4.  Relationships with HMRC should be transparent and constructive, based on mutual rust wherever possible. 

4.1  The features of this relationship should include: 
       •   disclosing fully the significant uncertainties in relation to tax matters; 
       •   focusing on significant issues; 
       •   seeking to resolve issues before returns are filed whenever practicable;  
       •   engaging in a co-operative, supportive and professional manner in all interactions; 
       •   working collaboratively to achieve early resolution and hence certainty.

4.2  Where the bank believes its proposed transactions may be contrary to the intentions of Parliament, the bank will explain its plans in advance with HMRC.

4.3 If, exceptionally, the bank discovers a transaction or arrangement has taken place where the tax result may be contrary to the intentions of Parliament, it will disclose the circumstances to HMRC at the earliest available opportunity, without waiting for the relevant tax filing date.  

This can be contrasted with the Code I wrote for the Tax Justice Network and Association for Accountancy and Business Affairs which says:

A Code of Conduct for Taxation

Objective

This Code of Conduct relates to the payment of taxes due to a State or other appropriate authority designated by it.

Scope

This Code applies to:

1. Governments and their agencies in their role as tax legislators, assessors and collectors;
2. Taxpayers, whether individuals, corporate bodies or otherwise;
3. Tax agents, whether they are undertaking tax planning or assisting with tax compliance.

Application

It is intended that this Code be voluntarily adopted by States and should be used to guide the conduct of taxpayers and their agents who choose to comply with it whether or not they reside in a State which has adopted the Code.

The Code

The Code is divided under six sections, each of which includes three statements of principle.

1. Government

a. The intention of legislation is clear and a General Anti-Avoidance Principle (‘Gantip’) is in use;

b. No incentives are offered to encourage the artificial relocation of international or interstate transactions;

c. Full support is given to other countries and taxation authorities to assist the collection of tax due to them.

2. Accounting

a. Transparent recording of the structure of all taxable entities is available on public record;

b. The accounts of all material entities are available on public record;

c. Taxable transactions are recorded where their economic benefit can be best determined to arise.

3. Planning

a. Tax planning seeks to comply with the spirit as well as the letter of the law;

b. Tax planning seeks to reflect the economic substance of the transactions undertaken;

c. No steps are put into a transaction solely or mainly to secure a tax advantage.

4. Reporting

a. Tax planning will be consistently disclosed to all tax authorities affected by it;

b. Data on a transaction will be consistently reported to all tax authorities affected by it;

c. Taxation reporting will reflect the whole economic substance and not just the form of transactions.

5. Management

a. Taxpayers shall not suffer discrimination for reason of their race, ethnicity, nationality, national origin, gender, sexual orientation, disability, legal structure or taxation residence; and nor shall discrimination occur for reason of income, age, marital or family status unless social policy shall suggest it appropriate.

b. All parties shall act in good faith at all times with regard to the management of taxation liabilities;

c. Taxpayers will settle all obligations due by them at the time they are due for payment.

6. Accountability

a. Governments shall publish budgets setting out their expenditure plans in advance of them being incurred, and they shall require parliamentary approval;

b. Governments shall account on a regular and timely basis for the taxation revenues it has raised:

c. Governments shall account for the expenditure of funds under its command on a regular and timely basis.

Enforcement

States seeking to comply with the Code will voluntarily submit themselves to annual appraisal of their Conduct. These appraisals will in turn be reviewed by a committee of independent experts appointed by participating States. Differences of opinion will be resolved by binding arbitration.

Any taxpayer or agent wishing to comply with the Code may do so. A State should presume that a person professing compliance with the Code has done so when dealing with any tax return they submit. In consequence the administrative burdens imposed upon that person should be reduced. In the event of evidence of non-compliance being found any consequential penalty imposed should be doubled.

The next blog will highlight some of the issues that arise from the government’s plans.

Richard Murphy Code of Conduct

The government has published its consultation document on the planned Code of Conduct of Banks.

It justifies targeting banks for these reasons:

Tax avoidance is not exclusive to banks, but banks are uniquely placed in that they:

•  can seek to avoid their own tax liabilities, whether this involves increasing the recovery of VAT incurred on their transactions, reducing their profits liable to corporation tax or minimising their and their employees’ income tax and national insurance contributions;
•  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, for example by providing loans of tens of billions of pounds for periods sometimes as short as a few hours. 

The Government believes that, in the light of the significant taxpayer support provided to stabilise the banking system, taxpayers are entitled to expect that banks, important taxpayers in their own right, and their customers pay their fair share of tax.

I’ll have more to say on this late.

Richard Murphy Banking, Code of Conduct

I drafted the Tax Justice Network / Association for Accountancy and Business Affairs code of conduct for tax in 2007 ( summary here). It attracted some attention at the time at selected addresses in Paris and London SW1, but there was not a lot of strong positive feedback right then. Being nice to banks was in vogue.

Not ant more.

In another indication that the world is moving (albeit not as fast, and not as far as I’d like, but moving nonetheless) in the direction of tax justice the Guardian has noted:

Banks which help their customers to avoid paying tax will be targeted by intensive surveillance from HM Revenue & Customs under a new "name and shame" regime to be announced by Alistair Darling next week.

The chancellor is understood to have a hit list of UK and international banks which he will invite to sign his new code of conduct on tax which is designed to save the taxpayer billions of pounds lost through legal and complex avoidance schemes.

Banks that refuse to sign the code of conduct or act against the "spirit" of the current tax laws will be subjected to heavier scrutiny from the tax authorities. Darling will also make it clear that chief executives of non-compliant banks will be forced to appear before MPs sitting on the Treasury select committee. Banks are under no obligation to sign up but will be expected to answer requests from the public about whether they have signed up.

Excellent. Quite right too. make them justify their anti-social behaviour.

Predictably the tax profession is not happy:

Ever since Darling announced his intention to publish the code, there has been criticism from some tax experts about how the "spirit" of the law should be interpreted. However, a Treasury source disputed this: "It is quite clear to market professionals what the spirit of the law actually means".

I agree, wholeheartedly. The person who cannot spot that should not be in practice.

And as indication of where this will go:

The Treasury source said: "We will start with the big banks and work through the system."

"We have some confidence that Barclays will sign up to it," the source added.

The source said: "There will a lot of embarrassment and public pressure and trips to the Treasury select committee to be humiliated by a lot of MPs. This is a name and shame policy".

Just what I wanted.

And excellent news for the ordinary taxpayers of the UK, because this is going to swing the pendulum of obligation to pay back towards the banks. And that’s the right thing for our economy. They have abused for far too long. And now the game is up.

Richard Murphy Banking, Barclays, Code of Conduct, Ethics, Tax avoidance