Firms suffer from banks' fear of avoidance

BANKS ARE becoming increasingly cautious of the potential of the existence of tax avoidance arrangements when considering lending decisions, accountants have been warned.

Banking protocols were introduced after the 2008 banking crisis to encourage responsible lending, including stipulations to refrain from funding tax avoidance schemes.

However, Nigel May, a partner at MacIntyre Hudson, warned that the difficulty of implementing these rules, differentiating between what is and what is not tax avoidance and the pressure on banks’ legal departments to consider the “relatively alien landscape of tax law”, has led to some banks questioning legitimate tax planning.

“The current environment in dealing with the banks is in any case really quite difficult,” he said. This has been exacerbated in instances where there is “anything at all unusual” about a firm’s structure for example, he added. Two instances have been encountered of the firm’s clients, both professional partnerships, being required to go to significant lengths to prove that their plans to recapitalise are not tax avoidance schemes.

“I think it is well accepted that normal tax planning is not synonymous with tax avoidance. But it is quite difficult to get the banks to see in practice which side of the line a proposal falls” he said.

Stephen Herring, tax partner at BDO, said that banks have become more cautious about tax avoidance schemes.

“Banks are starting to ask more questions about the validity of certain positions,” he said. “I had a letter today asking us to reconfirm the tax position of one of our clients. In my view, banks are increasingly unwilling to participate in aggressive, pre-packaged tax avoidance schemes which they have not reviewed.”

Phil Shohet, director at KATO Consultancy, said that banks were “overly conservative” when it comes to lending to partnerships.

“Suddenly they have decided because they are not structured in ways they do not understand that they will not lend,” he said. “It is a regime they have never had a problem with. This is why many accountancy firms are allowing non-accountants to invest equity. Banks don’t understand the structures.”

A spokeswoman for the British Bankers Association said that the primary concern for banks is the client’s ability to pay back the loans, although other checks required by law, such as counter terrorism and money laundering checks, will be taken into account.

Anyone who has been refused a loan has recourse to appeal to more senior members of the bank, she added.