Opinion

Turning voluntary compliance into compulsion

Clive Jones, partner at international law firm Eversheds, expresses concern about the trend towards making voluntary tax codes into compulsory behaviour   

At the UK Financial Services Authority (FSA)’s annual public meeting on July 23, Nigel Harper, a banking adviser to HM Revenue & Customs (HMRC), suggested that the question of whether banks sign up to the new voluntary tax code for banks should be taken into account for the purposes of determining whether bank employees are fit and proper for approval by the FSA.  In response to this, the FSA indicated that the topic is likely to be one of the points raised in its consultation on the fit and proper person test expected later this year. 

Although the HMRC has stated that Harper was not acting in an official capacity, the suggestion that the FSA should take into account whether banks comply with the new code in determining whether their employees satisfy the fit and proper person test is a somewhat worrying development. The FSA may only grant an application for approval if it is satisfied that the candidate is a fit and proper person to perform the relevant activity. In view of this, if the FSA intends to take the view that employees of banks which fail to comply with the code are not fit and proper persons then this would effectively make what the government intended to be a voluntary code for banks, compulsory. 

The new tax code is itself currently subject to consultation, with a view to its final text being published this autumn. The code is aimed at encouraging banks to take the moral high ground by ensuring that they and their customers pay more tax than is legally required by applying the spirit, rather than the letter of the law. The code seeks to achieve this by persuading banks not to participate in or promote transactions which achieve a tax advantage which goes beyond reasonable tax planning. 

There are a number of potential concerns with the code which may make many banks reluctant to sign up to it in its current form. One of the main problems is that everyone has a different view of what tax planning is reasonable and what is not. Therefore, different banks, and different people within the same bank, will take different views about this. In light of this, it will be difficult and potentially administratively burdensome for bank’s to implement the code. There is also a risk that differences in the way in which the code is implemented and interpreted may distort competition. 

The code attempts to solve some of these issues by requiring banks which propose entering into or promoting transactions where there is significant uncertainty as to how Parliament intended the legislation to be construed to seek the Revenue’s views on this. Although the code does require bank’s to comply with the Revenue’s views, banks which regularly take a different view from the Revenue may be treated as failing to comply with the spirit of the code. There is also a risk that banks which rarely discuss proposed transactions with the Revenue, on the basis that they consider that Parliament’s intention is sufficiently clear, may be viewed by the Revenue as being in breach of the code. 

It can be seen from this that the code essentially gives the Revenue a tool for seeking to impose its interpretation of tax law on banks and their customers.  There are likely to be numerous instances where the views of banks diverge from those of the Revenue.  It should be born in mind that the Revenue’s views of how Parliament intended legislation to be interpreted have often proven to be incorrect as evidenced by the fact that the courts regularly prefer the taxpayer’s interpretation of tax law to that of the Revenue.  

One would hope that the FSA will not help the Revenue enforce the new tax code for banks.