Digital Transformation » Systems & Software » TAX

In the light of the Chancellor’s commitment in his Budget speech to focus still more Inland Revenue/Customs resources on fighting tax avoidance and investigating large traders, there are a number of tax-based questions that every financial director should be asking himself:

– Is my tax function handling risks effectively?

– Are we prepared for self assessment and tax audits?

– Am I spending too much/too little on tax management?

– Is my tax charge the minimum it can be within an acceptable level of risk?

To some extent these questions can be summarised into one key question: Is my company – actively – managing tax or is tax just “something that happens” to it?

The reason this is key is because actively managing tax increases shareholder value. This will be even more so as the complexities of tax legislation and the resources made available to tax authorities to seek out extra tax increase.

Yet against this background, the drive to improve tax management has in many companies focused primarily on reducing tax compliance costs.

However, tax compliance costs are only part of the picture. It is more appropriate to consider the entire costs of managing tax.

There are three main types of costs associated with managing tax:

– total tax payments (“above” and “below” the line);

– penalties and interest associated with tax payments; and,

– tax management costs (costs in tax department and/or advisors).

By focusing on only one of these elements (tax compliance costs) companies may be missing out on greater savings in tax payments, penalties and interest which could be generated by extra input from the tax function. It is a salutary tale that while the increase in compliance costs over recent years has exceeded growth in RPI (33% over five years as opposed to 14.5%) both are dwarfed when compared to the growth in UK corporation tax receipts which has exceeded 100% over the same period.

In short, it may well be time for companies to embark on their own “spend to save” programmes – to borrow a sound bite from the Chancellor.

So, if a company decides to invest in actively managing its tax position where should it start? The first stage is to develop a tax strategy – a long-term statement of how the company will manage tax.

Research has shown the majority of companies do not have an integrated tax strategy governing the whole group. An effective tax strategy should address how the company will manage risk, relationships with tax authorities, public profile and the key drivers of the tax charge. The strategy should be supported by detailed measurable objectives which support the overall company objectives and take into account what is achievable based on the current position.

Having developed a tax strategy and tax department objectives, a problem that is likely to emerge is a shortage of tax resources. Having argued for an increased investment in tax management, it is necessary to realise pressure to control costs is an inevitable feature of business life in most industries today. Hence, as much of the resource gap as possible must be made up from operating efficiencies.

Research has shown that up to 70% of a tax function’s time is spent on collecting data to produce tax filings. If data can be collected in a more effective way, time can be released to bridge the resources gap.

The amount of time spent collecting data has increased in recent years, partly as a result of devolvement which has lead to the number of sources of data increasing dramatically in many companies. The data collection burden is about to increase again as still more information is needed to comply with new rules on foreign exchange, controlled foreign corporations etc.

In our experience, improving the efficiency of the data collection process uses three main tools:

– a detailed review of current procedures and issues;

– better training for staff on tax information requirements to be provided; and

– better use of information technology.

Information technology solutions really come into their own in the data collection arena allowing time-consuming rekeying to be eliminated, while producing a more robust document trail which will be of greater assistance as the UK tax authorities move to an audit-based approach.

In addition to having to resolve the resourcing issue, the company intent on actively managing its tax charge will have to find a way of getting its operations people actively to support a global-tax strategy. The blockers to this are varied, ranging from a focus on “line-of-business” results rather than the impact on group results, to the fact that operations management are measured on a pre-tax rather than a post-tax basis.

The good news is that these blockers are largely within the company’s control. The first stage in dealing with this is often communication of the tax issues facing the company and the company’s tax strategy.

This needs to be backed up by clarifying responsibility for, and ownership of, tax issues in the group and maybe a shift in bonusing arrangements.

This whole process – identifying a strategy, resolving issues and obtaining buy-in from operations is likely to require a significant input at senior levels within a company and it is tempting to look for solutions that are more easily identified. In an effort to do this, a lot of interest has been shown in benchmarking the tax functions of multi-national corporations.

In our view, these surveys provide some useful statistical data for the average tax function but no easy solutions. The key message is that there is “no right way to do it”, the solution has to be tailored to the needs of each individual entity.

To sum up, actively managing tax can significantly increase shareholder value but in order to achieve this some investment is needed now. In the current environment of increased tax complexity, and imminent onslaught from the Revenue on major traders, the time is ripe for companies to “spend to save” to ensure they are actively managing their tax.

Michele Faull is partner and Linda Stevens senior manager in the corporate and international tax department, Coopers & Lybrand.