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Plan to strengthen bank tax code flawed

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2nd Sep 2013
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A plan to name banks that break an agreement with HMRC not to use “aggressive” tax avoidance schemes has received a mixed reaction from across the profession.

The ICAEW said the plan to strengthen the voluntary agreement was “flawed” and could deter UK investment but one small business group said banks should face the same rules as everyone else.

Unlike tax evasion, tax avoidance is not illegal. But under the 'code of practice for taxation of banks', which was introduced in 2009, banks agree not to engage in tax avoidance.

More than 250 banks have signed up to the code, including the UK’s top 15 banks, according to HMRC. HMRC said that the code is operating well but isn’t open enough.

It’s also concerned that banks that break the code don’t face any consequences. A small number of banks may be interpreting the code differently to others.

Doubts have been raised over the effectiveness of the code. In 2012, the Treasury passed legislation to block to “highly abusive” abusive tax schemes by Barclays. The Treasury said the schemes could have cost it £500m.

HMRC has consulted on plans to strengthen the code. From 2015, it plans to name any bank it believes is breaking the tax code.

In this year’s Autumn Statement, HMRC plans to publish a list of banks that have newly signed up to the code or re-confirmed their commitment to it.

The ICAEW has criticised plans to strengthen the bank tax code.

Although the institute said that it supported “reasonable and properly targeted measures” to address tax avoidance it said the proposals to change the code are “fundamentally flawed” and “potentially damaging” to the UK’s reputation as a place for inward investment.

Under the code, banks are asked to follow the spirit as well as the letter of the tax law.

This means that while banks may undertake “tax planning” to help their business it should not be done to achieve “tax results”, such as paying less tax. That would contrary to the intentions of parliament.

Are loopholes being used to arrive at “an unexpected result”? If they are, it’s probably against the spirit of the tax law.

All clear? Not according to the ICAEW.

“Given that it is not always clear, for example, what are the intentions of parliament, we do not believe it is appropriate to require HMRC to be both judge and jury as to whether the bank can be held to have had such reasonable belief,” the ICAEW said.

The ICAEW wants “independent scrutiny” before banks HMRC believes to be breaking the tax code are named.

“Naming and shaming a bank could inflict significant reputational damage for HMRC and its staff, and it would only need one mistake to destroy its credibility with the banking and business sectors as well as leave HMRC vulnerable to legal challenge.”

The British Bankers Association declined to comment on plans to change the code but is understood to share some of the ICAEW’s concerns.

The ICAEW may be out of step with small business on the issue of bank tax rules, however.

Phil Orford, chief executive of the Forum of Private Business, which represents 18,000 small businesses in the UK, told AccountingWEB: “If there is evidence of tax avoidance this would further bring into question the banking industry’s credibility of playing by the accepted rules. Those who do have nothing to fear, those who don’t should face the consequences.”

HMRC has said it introduced the tax code for banks because banks have done and promoted more “aggressive” tax avoidance than companies in other industries.

Banks have access to large amounts of capital which they can use to facilitate avoidance schemes designed and implemented by others, HMRC said.

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