The UK’s Tax Code of Conduct for Banks: 1 failure, 2 omission and 3 oversights

June 30th, 2009

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 omissions from the Code are twofold. First there shoukld have been an obligation 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. Second, without a doubt HM Revenue & Customs should have 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.

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.

Written by Richard Murphy

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