ARABELLA SAKER<br /><strong>PARTNER, MAURICE <br />TURNOR GARDNER LLP<br /></strong><br />HM Revenue &amp; Customs recently published a consultation on a new code of practice on taxation for banks, setting out new rules with which banks are expected to comply &ldquo;in light of the significant taxpayer support&rdquo; that has been given to the industry. Although voluntary, banks which don&rsquo;t sign up will be subject to greater scrutiny from HMRC, and possibly from the FSA &ndash; a representative of HMRC last week asked the FSA to consider finding that senior executives of non-compliant banks are not &ldquo;fit and proper&rdquo; persons. Even more worryingly, these rules are in danger of making UK banks uncompetitive. <br /><br />The new code will require banks to observe the &ldquo;spirit&rdquo; as well as the letter of tax laws. To that end, banks are being asked to do something no other industry or person is asked to do: to decide for themselves what parliament&rsquo;s intention is, and follow that rather than merely the written law that parliament has enacted. They must not structure their own deals, and their employees&rsquo; compensation, so that less tax is paid &ndash; and must not develop or promote products which help their clients to mitigate tax.<br /><br /><strong>DRAIN FROM UK</strong><br />The latter point is of real concern to the future competitiveness of UK banks. While other UK industries and professions are not subject to the same rules, tax planning will continue. Perhaps more relevantly, the banking industry outside the UK will not face the same constraints on its activities, which will lead to a drain from the UK&rsquo;s economy of talent and profit. <br /><br />There is little doubt that the public wants the banks to feel shame for their role in the global recession. But isn&rsquo;t there a risk that, in search of a new moral code for banks, this code could do for the UK financial services industry what Sarbanes-Oxley did for US capital markets? The role of the banking sector is not to provide a safeguard against the possible inadequacies of parliamentary drafting. The FSA&rsquo;s chairman, Lord Turner, remarked that the FSA is &ldquo;not a tax enforcement agency&rdquo;, and it is similarly hard to see how the banks can fill that role.<br /><br /><strong>STIFLE INNOVATION</strong><br />The code asks the banks to have a dialogue with HMRC where there is doubt about a particular product, but HMRC has no power to tell the banks what parliament intended and its views cannot override or supplement the law. Only our elected representatives can create laws. So, if parliament&rsquo;s intention is unclear, the courts must interpret it; HMRC should not be permitted to fill the gap, nor should the banks be punished for guessing wrongly. <br /><br />HMRC (rightly) has batteries of weapons to assist it in its obligation to collect taxes properly due, from investigative powers to the DOTAS (Disclosure of Tax Avoidance Schemes) rules requiring those who develop tax schemes to disclose them. However, there are important legal and commercial differences between requiring a prosperous, energetic industry to disclose some of its secrets, and introducing rules which stifle innovation and competition.