Government and politicians are in a bit of a tizzy about banks and tax avoidance. In part this is because they effectively own one r two of the largest banks responsible for structuring and participating UK tax based structured finance (RBS, HBOS & Lloyds) and may be asked to take some assets from probably the biggest player in this market (Barclays).
HMRC are going to put out a voluntary code of conduct next month in the hope that banks will comply not just with the letter but the spirit of the law. Treasury officials say HMRC presses big companies, including banks, to comply voluntarily with the spirit of tax law but say this move would be aimed at complex bank schemes. There are threats of further action if a voluntary code doesn’t work. Vince Cable, the bald Liberal Dem whose banking credentials are as thin as his hair but this doesn’t stop him mouthing off whenever he sees a TV camera, said it was ““terribly limp-wristed”.
Believe me, it will all end in tears, for a number of reasons, but most fundamentally, there is no “spirit of the law” when it comes to tax. In accounting the directors of a company are required to exercise some judgement about the state of the company, the quality and value of its assets, and generally exercise some discretion when they draw up their accounts.
Tax is different. In order to ensure fairness between tax payers, a lot of the rules are drawn up as bright line tests, that is to say as factual tests which determine the taxation of business dealings. If it happened, it happened. If it didn’t happen, but something similar happened which had the same effect, the taxation is based on the what actually occurred. A transaction will be taxed according to the facts, and it is not up to the Revenue or the courts (except in complete sham cases) to recharacterise the facts to establish a different tax treatment. So what the voluntary code is asking banks to do is to not do a particular financial transaction if a similar outcome could have been reached by a different set of facts.
This is just over regulation. For example, imagine I own an unencumbered property which is leased out and I would like to make a further investment in a company. I could sell the property, in which case I would forego the rental income, but I might suffer a large capital gains tax charge. Alternatively, I could borrow the value of the property from a bank and assign all of the rental income from the property to repay the loan with interest. That is substantially the same transaction, but I defer any capital gain until the property is actually sold – a much less favourable outcome for HMRC. But is that outside the spirit of the law? Actually that is a bit of a non-question, because we pretty soon realise that the spirit of the law in tax law is no different from the law itself.
So what does the Government / HMRC actually want banks to do? The answer is most likely that they want to stop promoters of schemes from “promoting” them. Which is also ridiculous. Banks promote finance in all its available forms, and it would be ridiculous for a bank to propose a particular method of finance knowing full well that the taxation associated with that particular method of finance was more expensive for the banks customer than the alternatives. It follows logically that the banks will promote the schemes with the lowest overall cost to the customer with an acceptable return on risk and capital to the bank. Often, but not always that will involve tax amongst many other considerations.
What the government (and Vince Cable) want is for companies and banks to go against their best interests (and the best interests of their shareholders) by sticking to some nebulous benchmark of what is fair. Tax payers should respond by saying that what is fair is what is written down in the law to apply to all tax payers, applied equally to all tax payers, and not a penny more.