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FB 2016: Update on tax strategy publishing requirements

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Finance Bill 2016 introduces the requirement for large groups, companies and partnerships to publish their tax strategy annually.  The updated draft legislation and HMRC guidance provide further confirmation of the scope and requirements of the legislation.  HMRC, after some initial confusion around commencement, have very recently amended their draft guidance to confirm that the strategy should be published for the first time before the end of the first accounting period commencing after royal assent of Finance Bill 2016. The requirement that a company or group sets out the level of risk it is prepared to accept in relation to UK tax is likely to cause affected organisations particular difficulty, given its subjective nature.   

As a reminder, those entities affected by the new legislation will be required to publish their strategy by the end of the accounting period commencing on or after the date of royal assent of the Finance Bill 2016. For example, entities with a December year end will be required to publish their first strategy by 31 December 2017. The legislation only requires that the strategy is published to the extent it affects UK taxation. However, later in the article we consider the challenges that global groups may face around this point in more detail. 
The strategy must be published on the internet and made available to the public free of charge for a minimum of one year. The document must then be updated between nine and 15 months from the date of the last publication. We envisage this is designed to prevent patterns of publication which result in an undue delay in revisiting the strategy, e.g. publishing on 1 January 2017 and then not renewing the strategy until 31 December 2018.
We understand that HMRC accepts that any strategy is likely to be a longer-term document and may not always require significant changes year on year; however, it is keen to ensure that companies consider the tax strategy on an annual basis and make proper consideration of whether any changes are required. It is therefore important that companies take care when documenting the approval of the tax strategy and ensure it is aligned to the existing business strategy and risk profile of the group.

Scope of the legislation 

Finance (No. 2) Bill 2016 Sch 19, as it currently stands, together with draft HMRC guidance published on 31 March 2016 (, provides further clarity around the scope of the legislation. It is not surprising that those entities currently within the senior accounting officer (SAO) rules will be caught by the tax strategy provisions. 
However, perhaps a more unforeseen part of the new rules, as currently drafted, is that those UK entities which are part of an MNE group will be required to publish their tax strategy irrespective of their size in the UK. The guidance indicates that a group is an MNE group if it satisfies the OECD country by country reporting (CBCR) framework threshold of a global turnover of more than €750m. The legislation also indicates that the rules will still apply even if the group is not subject to CBCR, but if it would be so if the head of the group was headquartered in the UK. Additionally, UK branches of foreign incorporated companies and partnerships which exceed the turnover/balance sheet thresholds will also be in scope, even though they are excluded from the SAO provisions. 
Clearly, this provision will significantly extend the scope of the rules beyond the 2000 large companies that HMRC estimated to be caught in its original impact assessment, issued in December 2015. There could be a situation where activities in the UK are minimal but, given the entity’s global size, the UK business is required to publish a tax strategy. For example, there are many large US inbound companies with relatively minor operations in the UK. For these entities to publish a purely UK focused tax strategy could lead to an artificial result. 
Global groups will therefore need to think carefully about whether a global or UK strategy is appropriate. Whilst a global strategy will extend beyond the requirement of the legislation, some groups may consider this is the only way to articulate a meaningful strategy. One of the main purposes of the new rules is to raise tax on the boardroom agenda. This will obviously be a good opportunity for companies to engage with the board, particularly those entities which are headed by offshore parent companies which may currently have little interaction around tax strategy. However, the lack of autonomy in the UK which some entities may have around tax decision making could prove challenging when it comes to trying to articulate the tax strategy. 
We envisage, though, that one of the purposes of the legislation is to try and encourage better communication within such entities around issues which affect the UK tax position. We understand that there has been some lobbying of HMRC to encourage a de minimis limit to exclude smaller UK subsidiaries, but it is unclear whether this will be successful or, if so, the level at which any restriction might be set.
For those groups that have a UK based parent with significant activities in the UK, the decisions around whether to publish a UK or global based strategy may be slightly less complex. These decisions are likely to rest on the commercial implications of making the global strategy public. 

Implications of making a tax strategy public

Evidently, when an organisation drafts a tax strategy, the impact this will have on its ongoing relationship with HMRC is likely to be a key consideration. Also, we understand that an organisation’s approach to tax strategy will feature in HMRC’s decision around any risk rating. However, for some organisations the media scrutiny and subsequent reputational issues around making the tax strategy public will be just as significant, if not more of a consideration, when drafting the document. Tax is now a high profile and newsworthy issue, as the recent media coverage around activities in Panama has clearly illustrated, and this is by no means the first tax focused story to make national headlines. Some smaller, regional businesses have also been subject to adverse local media attention, largely from journalists interpreting information taken from public accounts and databases around contingent tax liabilities and ownership structures. 
What some organisations may consider to be relatively routine planning decisions could come into question. For example, choices taken around the ownership of intellectual property or contract manufacturing could be analysed in the media, particularly if it is questionable whether these decisions accord with the published strategy. In order for any tax strategy to be credible, it must be consistent with the activities of the business. It is therefore important that any tax planning or legacy issues are dealt with in the right way and should be tackled as part of any tax strategy process. Whilst it is not always possible to control media attention, consideration of the issues involved at an early stage could be key to mitigating the risks around media scrutiny.
Businesses with legacy tax issues need to consider their strategy carefully, as do those that have taken decisions around tax planning in the past which could create undue speculation in the media. It will not always be possible to change existing structures in the time frames under discussion and for some organisations there may be no desire to move to a lower risk strategy. However, how this is communicated both to HMRC and the public will need to be managed wisely. 

Content of a tax strategy

The guidance expanded on what HMRC expects to be included in a tax strategy, covering the four areas required under Sch 19. A company or group is required to articulate:
  • the approach to risk management and governance in relation to UK tax;
  • the attitude towards tax planning, insofar as it affects UK tax;
  • the level of risk in relation to UK tax that the entity is prepared to accept; and
  • the approach towards its dealings with HMRC.
Perhaps we expect an organisation to have the most difficulty in articulating its position around the level of risk that it is prepared to accept. This is because this is a very subjective issue. HMRC expanded on this point slightly in the guidance (page 5), indicating that in its view likely content would include: ‘An explanation of whether internal governance is prescriptive on levels of acceptable risk. If so, is this quantified and how is this affected or influenced by stakeholders?’
Interestingly, the guidance didn’t provide any more insight into likely content on this particular area and this was probably the most succinct of all four areas. By its nature, this is a very subjective requirement and open to interpretation. Perhaps HMRC is keen for organisations to be able to have flexibility in how they deal with this aspect of Sch 19. However, we expect that for many organisations their attitude to risk, to a degree, will be implicit from the commentary on the other three areas. For example, attitude to planning (and any associated documents, such as a code of conduct) should provide a clear steer on an organisation’s attitude to risk. In our experience, clients don’t often quantify acceptable levels of risk and document this; and for some, with relatively straightforward tax affairs, this would seem unnecessary. 
The majority of clients seek guidance around transactions and take an informed view based on appropriate professional advice in the round. Similarly, if areas of concern are identified, the extent of any errors is usually quantified and remedial action is generally planned to try and capture such anomalies going forward. A tax risk register could be a helpful document to assist in managing this requirement, particularly if this quantifies and prioritises the relevant risks and any associated remedial works, together with allocating responsibility for managing these. This could be helpful in dialogue with HMRC. However, we would not expect organisations to want this to be in the public domain, while some may feel reticent about sharing the document in its entirety with HMRC. This could require management. 
Conceivably, we can also see a situation where clients could view an approach to be robust from a technical perspective and therefore low risk. However, this could be subject to unforeseen challenge from HMRC at some point in the future. The nature of the challenge could be strongly at odds with how the organisation views the transaction from a tax perspective. This situation clearly illustrates how attitude to risk is subjective and will depend on a client’s attitude to planning and technical interpretation of the law in some circumstances. 
Clearly, the four required areas are not designed to be an exhaustive list and there are other areas which may be appropriate to discuss. For example, we would expect most large businesses to make reference to the way in which they manage and engage with professional advisers, as this is often fundamental to the management of tax risk in larger, more complex businesses. Similarly, companies have chosen to attach (often as appendices) other pertinent non-tax information around matters such as corporate governance and corporate and social responsibility. A handful of companies may consider including commentary on their effective tax rate, although this is likely to be the exception and driven by specific commercial and reputational issues, as many organisations are uncomfortable with sharing this level of detail publicly and with HMRC.

Action points for businesses

  • In our experience, the key to developing or updating a tax strategy is about getting the buy-in of the right stakeholders at the outset. Engagement with the right people in the organisation will assist in embedding a tax strategy across the business. 
  • Organisations should be careful to make sure that any final document is bespoke to the organisation and not ‘boiler plate’. Any document which is standardised could provide the wrong message to HMRC, both about how seriously the organisation approaches this issue and also the level of trust that can be placed in it. 
  • Likewise, the strategy will need to reflect how the business operates in practice and businesses should recognise that HMRC is likely to test and challenge this in the future.
  • Ultimately, there needs to be evidence of the business implementing the policies, procedures and governance to bring the strategy to life across the organisation.
  • Early consideration of the issues involved will help companies begin to embed the strategy ahead of the deadline for publication.