Clause 278 - The Code of Practice on Taxation for Banks: HMRC to publish reports

Finance Bill – in a Public Bill Committee at 4:15 pm on 17 June 2014.

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Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury) 4:15, 17 June 2014

I beg to move amendment 57, in clause 278, page 187, line 28, at end insert—

‘(1) Before bringing forward any further reform of The Code of Practice on Taxation of Banks, the Chancellor shall lay before Parliament a report considering the impact on the total receipts paid to the Exchequer since 2010 by—

(a) Uk banking groups;

(b) building society groups;

(c) foreign banking groups; and

(d) relevant non-banking groups.

(2) The report will pay particular attention to receipts from—

(a) corporation tax;

(b) the bank levy; and

(c) bank payroll tax.”

Photo of Martin Caton Martin Caton Labour, Gower

With this it will be convenient to discuss the following:

Clause stand part.

Clauses 279 to 281 stand part.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

We are getting there. I am sure people will be disappointed when these wondrous proceedings come to an end. Was that a cry for more? I suspect not. It is a pleasure to be here this afternoon to speak about these clauses. Of course, they arose following a consultation that was published back in May 2013 by HMRC on strengthening the code of practice on taxation for banks. That included draft legislation requiring HMRC to publish an annual report on the operation of the code.

The code is one element of the Government’s anti-avoidance strategy and is intended to change the attitudes and behaviours of banks towards tax avoidance. We have had a thorough debate on tax avoidance and are now looking at some of the specific issues around banks. Adoption of the code is voluntary, but the list of banks that have adopted it is published. So far, I understand that a total of 283 banks with UK operations have signed up to the code, including those defined as the so-called big banks.

The amendment would require the Government, prior to bringing forward any further reform of the code of practice, to lay before Parliament a report considering the impact on the total receipts paid to the Exchequer by UK and foreign banks, and building societies. We want specific attention paid to the receipts from corporation tax, the bank levy and the bank payroll tax.

It is important to recognise that clauses 278 to 281 require the tax commissioners for HMRC to publish a report on the operation of the code of practice on taxation for banks. The report must be published no later than the end of the calendar year in which a reporting period ends. The commissioners must determine breaches of the code and, where a breach has been established, may name the bank or entity in the report and must publish information relating to the breach, except in instances where that is not deemed to be reasonably practical. It also provides for the introduction of a governance protocol, delineating how the code will operate and setting out the rules for compliance. The protocol was published in December 2013 and is an  updated version of a previous protocol from 2012. It covers all banks that notified the commissioners that they have unconditionally committed to complying with the code on or after 31 May 2013, and sets out four possible views that the HMRC may have regarding a bank’s compliance with the code.

I will not go into a great deal more detail about what the clauses do because I am sure the Minister will wish to say something about that, but I do want to make a couple of comments, raise some issues and ask some questions.

We support the underlying principle of the code of practice, which goes back to 2009, under the previous Government. It is important to ensure that banks and building societies meet their tax obligations and make every reasonable attempt to comply with the letter and spirit of the law. We support making the code more stringent, ensuring that banks that fail to comply are made to face the consequences. We welcome the distinction that has been drawn between the smaller and larger banks and building societies, with the former having to comply only with the first part of the code. However, we believe that the Government should take a more holistic approach to the bank taxation regime and that is why we have tabled the amendment.

It would be straying from the subject of the clause to move too much into discussion of how the bank levy has failed to generate anything like the revenues projected, so I will not succumb to the temptation to do that yet again at this point. However, it is important to understand the reasons for that, which is why we want the amendment to be passed so that the report would look at the taxation regime in the round.

A concern about the proposed changes to the code has been raised by the CIOT. The changes have been described as

“fundamentally flawed and potentially damaging to the UK’s reputation as a place for inward investment…The proposals need to be reconsidered to ensure that they are proportionate, fair, workable and do not damage the UK’s reputation.”

That highlights an uncertainty that may surround what could be described as the intentions of Parliament and the spirit of the law in determining whether a bank has breached the code. Some respondents to the consultation argued that a participating bank could, quite reasonably, have a different interpretation of the intentions of Parliament from that of HMRC. This would be a good opportunity for the Minister to address that point because it is suggested that HMRC is being established as “judge, jury” and, indeed, “executioner” and I am sure that Ministers would not wish to have that tag attached to it but, none the less, want to deal with the questions raised.

The Law Society felt that HMRC had been granted too much discretion, arguing:

“It is not appropriate for HMRC to set itself up as the only arbiter of parliamentary intention in relation to matters within the code. This is a matter ultimately for the courts to interpret on the basis of the legislation passed by Parliament and the surrounding circumstances.”

It also raised concerns about the supposed voluntary nature of the code, pointing out that it is hardly voluntary when banks that have not signed up can be publicly named and suffer adverse publicity as a result. It would be interesting to hear the Minister’s comments on that.

I understand that the Government have, to some extent, picked up on and revised the protocol in the light of the concerns of some of the respondents to the consultation. However, it is a concern that some issues have not yet been addressed by revisions and I would be interested to hear the Minister’s view on some of the points raised. I have a few questions. Can he provide any information on the impact of the code to date on the level of taxation paid by the banks? What does he have to say on the observations of the CIOT, the Law Society and others that responded to the consultation that the revised code grants HMRC disproportionate power with insufficient safeguards to ensure that it is fairly exercised? That is one of the themes that has run through today. Everyone wants to see as much as possible done to ensure that individuals and organisations pay the appropriate taxes but, at the same time, proper checks and balances have to be built in. I would like to hear from him on that.

Do the Government agree with the recommendation that HMRC should consult the Financial Conduct Authority and Prudential Regulation Authority before publicly naming a bank found to be in breach of the code? Does the Minister consider it fair that HMRC can supersede the conclusions of the independent reviewer in deciding whether a bank has breached the code? Does that not risk undermining the legitimacy of the review system?

We have not had the opportunity to discuss the shadow banking sector in detail in this debate, but during the past few days concerns have been raised about it. Will the Minister consider extending the code to encompass that sector to address those concerns? So that we can understand the Government’s thinking, does he have any comment on the assertion to which I referred that the code could damage inward investment? I would like to hear his response before deciding whether to press the amendment.

Photo of David Gauke David Gauke The Exchequer Secretary 4:30, 17 June 2014

Clauses 278 to 281 require HMRC to produce annual reports from 2015 on how the code of practice on taxation for banks has operated. The reports will provide details of those banks and building societies that have signed up to the code as well as those that have not. It may also name any bank or building society that HMRC determines has not met its commitments under the code.

The voluntary code was introduced in 2009. Its purpose is to encourage banks to follow the spirit as well as the letter of the tax law. It is a key element of the Government’s anti-avoidance strategy and was designed to change the attitudes and behaviour of banks towards avoidance, given their unique position as potential users, promoters and funders of tax avoidance schemes. Since the code’s introduction, HMRC has seen a positive response from banks in their tax planning and transparency, which is in large part down to changing attitudes by banks towards avoidance. The code has been a significant factor in that change.

However, the code lacks public transparency. There are also no obvious downsides for banks in not adopting the code and no codified consequences for a bank’s  non-compliance with its code commitments. To address that, at Budget 2013 the Government announced plans to strengthen the code by making its operation more transparent. Banks were then asked to re-adopt on that basis. At autumn statement 2013, following consultation with the sector, HMRC published a list of those banks and building societies that had adopted the strengthened code. An updated list including further banks was published at Budget 2014.

Clauses 278 to 281 introduce legislation requiring HMRC to produce an annual report on the operation of the code. The first report will be published next year and will cover the period ending 31 March 2015. Clause 278 sets out the groups and entities to which the code applies, which are those in the scope of the bank levy provisions. The clause also provides that, in the annual report, HMRC may name any bank or building society that it determines has breached the code.

Clause 279 provides that banks and building societies wishing to sign up to the code must write to HMRC confirming unconditional commitment to the code. To withdraw from the code, a bank or building society must write to HMRC confirming that it is no longer unconditionally committed to the code. Where a bank or building society is named in an annual report as having breached the code, it will be treated as having withdrawn from the code until such time as HMRC is satisfied that it has once again met its commitments under the code.

Clause 280 provides that a governance protocol will set out how the code will operate. The protocol was published alongside the draft legislation and the autumn statement and sets out a number of safeguards, including the requirement for HMRC to commission a report from an independent reviewer before naming a bank or building society as having breached the code. Clause 281 provides that HMRC must consult members of the bank and building society sector before it publishes or changes any future guidance on the code.

I am conscious that during last year’s consultation, concerns were raised by the banks and legal profession about HMRC rather than an independent third party having the ultimate decision on whether a bank should be publicly named for being non-compliant. The Government listened carefully to those concerns. Although we consider it is right that HMRC commissioners who are directly answerable to Parliament remain the final arbiter on whether a bank has breached its commitments to HMRC under the code, we have introduced additional robust safeguards. The independent reviewer is expected to be someone who is independent of both the banking sector and HMRC and is held in good standing by both, such as a retired High Court judge. HMRC may reach a different determination from the independent reviewer only in two limited and exceptional circumstances where, viewed objectively, the independent reviewer’s opinion is unreasonable based upon the Wednesbury test of reasonableness used in judicial review proceedings, or where, viewed objectively, there are other exceptional and compelling reasons for HMRC reaching a different conclusion.

Where, contrary to the opinion of the independent reviewer, HMRC determines that a bank or building society should be named as non-compliant, and the bank or building society commences judicial review proceedings against HMRC, the onus will be on HMRC  to prove that it acted reasonably in reaching a different opinion from that of the independent reviewer. This reversal of the normal burden of proof is in recognition of the possible commercial and reputational damage that may result from a bank or building society being named in an annual report.

Turning to amendment 57, we already considered a similar amendment when we debated clause 113, and also during the Committee of the whole House. I do not know whether to be disappointed that Opposition Members are not showing more originality in their amendments or whether to be impressed by their consistency. Even when we have clauses setting out a requirement to produce reports, we still have an amendment requesting that different reports are produced, but there we go.

The amendment asks the Government to lay before Parliament a report that considers overall tax receipts from UK banks, foreign banks, building societies and relevant non-banking groups since 2010. As I have explained before, HMRC already publishes statistics on PAYE, the bank levy, corporation tax and bank payroll tax receipts from the banking sector each year, although not broken down by different groups of banks. The most recent publication, from August 2013, showed that the relevant tax receipts from the banking sector were £21.7 billion in 2012-13. This represented an increase of 6%—or £1.2 billion—on the previous year, despite corporation tax receipts continuing to be depressed by losses incurred during the financial crisis. The publication shows that 2012-13 receipts remain below the peak reached in 2010-11. However, the 2010-11 figure was inflated by receipts from the bank payroll tax, a one-off measure implemented on the day of the announcement, which the previous Chancellor said could not be introduced permanently. I am tempted to read the whole quote, but on this occasion I will not. However, hon. Members should be aware of it.

Bonuses in the banking sector have fallen markedly since the bank payroll tax applied, with the yield from a repeat tax likely to be much lower. The Government have also taken wider action since 2010-11 to tackle unacceptable remuneration and ensure that pay does not incentivise excessive risk-taking. Under the PRA’s remuneration code, large parts of bonuses must now be deferred and paid in shares. Firms are now required to have in place clawback policies to reduce or revoke pay where subsequent information on poor performance comes to light. That is why the Government chose instead to introduce a permanent tax on banks’ balance sheets, which helps to ensure a fair contribution from the banking sector while supporting the regulatory regime by encouraging banks to move towards safer funding profiles. I hope that will suffice to explain why we think the amendment tabled by Opposition Members is unnecessary.

The hon. Member for Kilmarnock and Loudoun asked whether HMRC was acting as judge, jury and executioner. As I said earlier, concerns were raised during the 11-week consultation exercise conducted over the summer. We have introduced the independent reviewer, as I mentioned. It is right that HMRC commissioners remain the final arbiter under the protocol of whether a bank has breached its commitments to HMRC under the code. Parliament, assisted by the National Audit Office, retains its oversight of HMRC’s decision-making processes.

Furthermore, as the code is about a bank’s behaviour, it follows that any decision on whether a bank should be named as not complying with its code obligations should be made close to the events. The inclusion of a formal appeals process could mean the decision was not published until years after the events, which would be counter to the code’s behavioural change objectives.

Could the provisions damage inward investment? There is no evidence so far to suggest that that will be the case. HMRC will clearly monitor the situation and keep it under review.

Do the Government intend to consult the PRA and the FCA before naming a bank? There are no proposals to do so, but we recognise that naming a bank is a potential source of reputational damage, which is why we have provided a number of significant safeguards to prevent banks from being incorrectly named.

I was asked how much additional tax has been brought in. It is not possible to determine how much has been paid as a result of the code, but the code increases transparency and HMRC’s ability to tackle avoidance in real time.

To conclude, now is the right time to strengthen the code. The changes made by clauses 278 to 281 help to provide full transparency on which banks have adopted the code and clear sanctions against those that breach it, while also providing robust safeguards for participating banks. That will help to reinforce the behavioural improvements already evident in the banking sector and support fairness in the tax system. I hope the clauses can stand part of the Bill.

Photo of Cathy Jamieson Cathy Jamieson Shadow Minister (Treasury)

I thank the Minister for his expansive answers, which took note of all my points, as well as laying out the Government’s views on a number of issues so that we have them on the record.

I do not know whether to be disappointed, although I am not surprised, that the Minister has once again failed to succumb to my pleas for a report, even though it is, on this occasion, just a different kind of report from the one he proposes to introduce. None the less, it is important to look at the wider issues around the taxation of the banking sector, so I will, on what is probably the last occasion I will have the opportunity to do so in this Committee, try one more time and press the amendment to a vote.

Question put, That the amendment be made.

The Committee divided: Ayes 14, Noes 18.

Division number 13 Decision Time — Clause 278 - The Code of Practice on Taxation for Banks: HMRC to publish reports

Aye: 14 MPs

No: 18 MPs

Aye: A-Z by last name

No: A-Z by last name

Question accordingly negatived.

Clause 278 ordered to stand part of the Bill.

Clauses 279 to 283 ordered to part of the Bill.

Schedule 33 agreed to.

Clauses 285 to 290 ordered to stand part of the Bill.

Schedule 34 agreed to.

Clauses 291 to 295 ordered to stand part of the Bill.