New tax strategy publishing requirements

HMRC and other external stakeholders expect businesses to pay the right amount of tax. As demonstrated by recent media activity, meeting this expectation is never straightforward and it has become a high profile issue for many organisations, with significant public debate about what amounts to a ‘fair share’ of tax. 

 

Finance Bill 2016 will introduce, within clause 65, the requirement for certain large businesses to annually publish a UK tax strategy document. This focus forms part of a wider movement by HMRC to take a risk based approach to administering tax compliance, seeking to identify those taxpayers who require the most resource and scrutiny. As part of this, HMRC wants to understand the governance and management of companies in more detail. It has introduced measures such as the senior accounting officer (SAO) provisions and know your customer (KYC), as well as the suite of proposed measures announced in the consultation document published in July 2015 Improving large business tax compliance. These all illustrate how HMRC wants to see tax on the boardroom agenda, and to gain further understanding about the decision making process around taxes management in businesses. 

 

While many of the formal measures are aimed at the UK’s larger entities, it is clear that this is considered ‘best practice’ for all businesses. All taxpayers should have an awareness of HMRC’s new approach and be mindful of this in interactions with tax authorities, so as to mitigate their level of perceived risk. It is also envisaged that this approach will, in time, apply more widely on a formal basis and not be reserved solely for the largest businesses. 

 

 

Although HMRC has indicated that it will be providing further guidance notes, these have not yet been published. However, we discuss the content of the draft legislation (at www.bit.ly/1P7sK4K) in more detail below.  

 

Those entities affected 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. It is required that the strategy is 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.

 

Although we are waiting confirmation from HMRC on certain aspects regarding the scope of the legislation, businesses caught will include those already subject to the SAO regime. It will also impact large partnerships (with a £200m plus turnover or gross assets in excess of £2bn); and there is a provision to include MNEs subject to country by country reporting requirements (those with a global annual turnover of £568m) in the UK, either in their own right or if their head of group were tax resident in the UK. Subject to any further guidance that might be issued, this seems to bring within scope some comparatively small UK subsidiaries of large MNEs.

 

There are four key requirements as to what the document must set out:

 

It is notable that HMRC has pulled back from including any requirement to include detail on the desired effective tax rate, a highly contentious feature of its original proposals. It has also moved away from insisting that a nominated member of the board must take responsibility, acknowledging that for any strategy to be successful it requires buy-in across the board and indeed the organisation itself.

 

If companies already have a global tax strategy, it appears the rules will be flexible enough for organisations to publish the parts that are relevant to the UK, rather than draft a whole new document.

 

The requirement is backed up by a penalty regime chargeable on the head entity of the UK group. It starts at £7,500 for failing to publish on time (or keep it accessible for a year), with further £7,500 penalties for failing to meet an extended six month deadline and then for every month thereafter. Appeals process and grounds broadly mirror the SAO regime.

 

Although the legislation only applies to qualifying entities, it is useful for businesses of all sizes, since it provides us with more detail around what HMRC expects from an organisation’s tax strategy. 

 

Clause 65 includes the requirement for qualifying businesses to explain their approach to risk management and governance. The new legislation is formalising a view that HMRC has had for some time, as is clearly illustrated in the following extracts from a HMRC risk and governance questionnaire, which asked the following questions: Does the group have a written tax strategy? How often is it reviewed and updated? By whom is it updated? By what means is it communicated to employees?

 

The questionnaire also asks a number of questions around the make-up of the board and the backgrounds, experience and duties of the individual board members.

 

Many companies do not feel ready for this sort of scrutiny around governance and strategy and are not prepared for these conversations which can lead HMRC to perceive companies as higher risk. 

 

 

HMRC has noted that it often sees organisations having difficulty embedding their tax strategy. Any strategy must be clearly defined, aligned with the business objectives and embedded in the way the organisation operates. It must be documented as a live record supported by controls and processes, and must be more than a broad isolated statement of intent around tax governance. HMRC is of the view that this should be a board led initiative (with the buy-in of the whole business) and therefore the manner in which any tax strategy is developed and articulated, together with the annual approval process, is very important. 

 

We expect HMRC to provide training to customer relationship managers (CRMs) to prepare them for the conversations they will need to have with organisations around these measures. We envisage that these discussions will form part of the risk review process and that CRMs should be seeking to understand how the tax strategy has been implemented and embedded across the organisation in practice. 

 

 

A tax strategy is a high level document articulating the view of the board on tax and how tax risk is managed across the business. It is not designed to be an operational manual and this level of detail should generally be reserved for policy and procedure documentation.

 

Clause 65 sets out four areas required to be included within the published strategy document, as detailed above.

 

As part of developing a tax strategy, it is important to understand who the key stakeholders of the business are. Internal stakeholders, such as the FD, CEO or those with day to day responsibility of tax, should be consulted from the outset. The organisation must understand and accurately articulate the priorities for tax, including the overriding vision, strategic direction and appetite for tax risk. This must be considered alongside the commercial plans for the business. The practical implications of moving to a new strategy will also require some thought. Many companies find a facilitated workshop can assist them in articulating their tax strategy. It is important that any tax strategy is bespoke to the organisation; and the use of pro forma documents is not advised and is unlikely to meet HMRC’s expectations.

 

Once agreement has been reached, the strategy should be documented and be formally approved by the board. This strategy should be shared with relevant parties, whether internal or external, and a plan should be agreed to promote awareness across the organisation. Consideration should be given to the existing policies, resources and capabilities and what is needed to support the new strategy. Any changes necessary to assist in the delivery of the new strategy must then be implemented. 

 

The tax strategy must be periodically reviewed to consider whether it remains appropriate and is being delivered, capturing any further necessary changes.

 

The consultation document which preceded this legislation suggested that large businesses may need to state within their published tax strategy whether they have signed up to a new voluntary code of practice being proposed for large corporates, also included within the consultation document. However, this requirement has been removed from the legislation and the code of conduct has been redrafted into a ‘framework for cooperative compliance’. This is now a set of guiding principles which both HMRC and clients are expected to support – there is no longer a request for clients to formally agree or sign up to the framework. This change followed significant feedback that the initial wording of the code lacked any element of mutuality and did not indicate what businesses could expect of HMRC in order to facilitate many of the objectives around cooperation and transparency. All documents on this, including a copy of the draft framework, can be found at www.bit.ly/1m6KdhV.

 

 

HMRC commissioned an external study on the theory behind tax strategies (see www.bit.ly/1Ku2lqk).

 

Whilst this is an extensive report, some key themes were highlighted and this document illustrates how organisations must take care when documenting their strategy. This study indicated that the language used could be a good indicator of risk appetite and therefore the wording of such a document can lead HMRC to draw conclusions around a business’ attitude to tax; for example, this study suggested that more detailed strategies were often indicative of compliance. Conversely, those that contained bland words such as ‘transparency’ and ‘compliance’ could be indicative of implicit strategies with the purpose of creating maximum flexibility. This flexibility was considered to demonstrate an appetite for risk. 

 

Clearly, as an organisation is required to publish its strategy under the new rules, managing the level of detail appropriate will require some thought. It may be beneficial to talk through any challenges with HMRC ahead of publication, or to provide it with more detailed unpublished policy documents.

 

 

Now the required content of the strategy is clear, it will make sense for those impacted to begin preparatory work around tax risk reporting and governance to enable both the strategy to be accurately articulated and the business to operate consistently with that strategy. Those with existing tax strategy documents must consider these in light of the new legislation. Those entities which adopt the rules early will be able to engage with the board properly on the issues involved and potentially influence the board’s attitude to risk, if appropriate. Early adoption will also enable taxpayers to share the strategy with HMRC to gain an insight into its views on the approach taken, ahead of any requirement to publish.

 

For smaller companies which are not caught by these measures, thought should still be given to their methodology to managing tax risk across the business in light of HMRC’s new approach, and the increasing number of HMRC systems and process reviews we are seeing take place in small and mid-size corporates. Many of these companies would still benefit from devoting some resource to tax risk and this may include documenting systems and processes, testing the robustness of these and implementing corrective works, if appropriate.

 

A clearly documented and fully implemented tax strategy will provide a strong platform for any business aiming to make a positive impact on its HMRC risk profile.