Risk & Economy » Tax » Staying out of trouble

In a simple world, all a business must do to stay on good terms with HM
Revenue & Customs is to “pay your taxes”. But with increasingly blurred
boundaries and a new structure at the Revenue, UK corporates are facing a
difficult time in knowing what is right or wrong and who to ask for guidance.

For authorities there is no dilemma – businesses should be paying what they
owe. They would argue that the only question a chairman need ask himself is,
“Would I be happy to have my company’s tax strategy spread across the front
pages of the national press?” If not, then the answer is “Don’t do it”.

But in an environment created by Chancellor Gordon Brown declaring a year ago
that avoidance has created a tax gap, it is not so straightforward. As a result,
mistrust has grown on both sides of the fence.

In the time since, new legislation on disclosure and reporting has coincided
with the unveiling of a redesigned HMRC which is still bedding in, leaving many
companies confused over who to contact and uncertain over what is and what isn’t

“The government sees tax as a tool of social and economic behaviour,” says
Chris Sanger, the partner for tax policy development at Ernst & Young.
“There’s a lot that FDs can do to change methods of communication. They should
be engaging proactively with government rather than on a post consultation
basis. Business needs to learn to get its arguments clearer to communicate them
to government.”

Recently a more conciliatory approach seems to be coming from authorities,
particularly the Large Business Service (LBS) at HMRC which is manned by the
same crack team that turned things around at Customs a few years ago, when a
disparity between tax take and tax calculations emerged. David Garlick, the
director of LBS, admits that work still needs to be done on making definitions
clearer on what is avoidance and where certain tax planning is acceptable. The
mood, however, remains one of robust enforcement.

“The big challenge is in avoidance,” says Garlick. “I think we have worked
hard on what is contrived and what isn’t – where you have tax vehicles with no
commercial sense that are purely set up to avoid tax. But it’s not to say we
can’t go further in explaining what is avoidance and what isn’t.”

Garlick wants FDs to make tax the ultimate boardroom issue. “I’m not sure if
chairmen have had a discussion with their FDs and the board about tax and risk,”
he adds. “Some businesses have got into trouble where the managing director has
no knowledge of tax. It’s all about boards taking a risk approach.”

Risk-based approach

To improve communication with businesses, Garlick is overseeing a pilot that
will result in many of the UK’s largest companies having a single point of
contact. It’s a new risk-based approach which Garlick hopes will help target
resources more carefully to highrisk areas, and speed up enquiry times.

“We want to build close relations with representative bodies for sectoral
interest groups,” says Garlick. “Beneath that there will be a client
relationship manager to deal with communication in real time.”

Some advisers are upbeat about developments despite still feeling there is
much room for improvement from the Revenue. “It’s a two-way process,” says John
Whiting, tax partner at PricewaterhouseCoopers. “It’s not just about companies
being good. It’s HMRC recognising they have to take care of their customers.
Ideally companies want to pay less tax, but most of all they want less hassle
and more certainty. Business has realised it needs to take a more engaged
attitude. It’s not just a question of compliance. And HMRC recognises that
business is important and has to work to improve links.”

Business representatives say part of the problem has been that for too long
there’s been a perception among authorities that corporate tax directors sit
huddled in darkened rooms plotting to conceal tax due. Some might argue there’s
some truth in the perception, and that it’s right for HMRC to retain a
reasonable level of scepticism.

Positive moves

Nevertheless there have been positive moves on both sides. The shift in
personnel inside the new HMRC has improved its ability to understand what drives
business behaviour. For its part the Large Business Service will take a
risk-based approach to its ‘customers’. It does this by looking carefully at the
structure, financial planning, the nature of the business and any particular tax
risks, especially those that are industry-specific (see box, above).
Intellectual property issues are of particular concern to pharmaceutical
companies, for example, while commercial property causes problems for retailers’
tax accounts. Transfer pricing is a huge issue, of course, and HMRC is keen to
ensure that businesses understand the kind of standards of documentation of
transfer pricing policies they ought to be keeping. Don’t mistake this sort of
dialogue for friendly advice, however. Companies are expected to pay
professional advisors for that.

Companies have restructured tax strategy in a bid to smooth relations and
have found it provides them with a stronger foothold in which to lobby
authorities in cases where new legislation has an “unintended” effect.

On the whole companies remain on the defensive and tax authorities still have
their teeth bared so relationship building will be slow going. But if businesses
want to ensure their reputations remains intact and plan within the law they
will have to engage more. Of course, officials must ensure the channels of
communication remain open and provide clearer definitions.

Still, tax is making its way up to the boardroom and the Revenue, by the
looks of it, is planning a more open relationship with business. Businesses must
now make sure they are equally transparent in their affairs.

LBS launches charm offensive
HMRC’s Large Business Service, which is responsible for the direct and
indirect collection of tax from 2,500 companies, is running a pilot system aimed
at improving relations with business.

The LBS covers 50% of the total UK tax take with the majority coming from the
largest corporates.

By bringing together indirect and direct tax the LBS hopes to offer a more
joined up approach to business.

LBS is building up 18 different industry sectors but the pilot includes just
oil and gas, finance, alcohol and tobacco. Eighty companies are currently part
of the trial that hopes to offer the largest businesses a single point of

The new compliance process will also provide a head-to-head service with
finance and tax directors.

In a bid to share the burden, the new riskbased approach is designed to be
more transparent by allowing FDs and tax directors to understand HMRC’s
perception of risk and permits them to challenge it.

“We haven’t gone far enough in sharing the risk side. If we have a better
understanding of the sectoral issues then we will be able to discharge the risk
more easily,” says David Garlick, the LBS director.

Garlick says that if the tax risk can be understood more clearly on both
sides then resources can be channelled more readily into high-risk areas.

Ultimately, the goal is to speed up enquiry times and ensure more openness
and transparency.

A full roll-out of the new structure is scheduled to take place next April.

Getting tougher
HM Revenue and Customs will no doubt be anxious to strut its stuff now that the
tax authorities’ merger is complete, writes Peter Bartram.

Chancellor Gordon Brown’s public reason for creating the giant department is
to squeeze out administrative savings. The more significant, but barely
mentioned reason, is to squeeze more tax from corporate and individual

Faced with looming budget deficits as far as the eye can see, the Chancellor
is keen to increase the tax take without raising politically sensitive tax
rates. He has also committed £150m to toughen up compliance measures.

The merger presents a major integration challenge. But James Bullock, a
partner in the tax litigation and regulatory practice at law firm McGrigors,
says it also creates a number of problems for finance directors.

One significant issue still to be resolved is which department’s powers will
be used for compliance visits. Under present law, Customs and Excise can turn up
at business premises unannounced, while the Revenue generally has to book an

But there are broader questions about the basic modus operandi of compliance
officers in the new department. “Customs operate very differently to the
Revenue,” says Bullock. “Customs are used to dealing with nasty pieces of work –
smugglers and hard-core criminals. But they’re going to have to adopt a nicer
attitude when they walk into a FTSE company.”

Even so, rumour has it that HMRC will be keen to engage in some highprofile
raids early in its life, if only to make its mark and pour encourager les
autres. One particularly sensitive area, Bullock warns, is likely to be the
employment of casual labour and so HMRC has set up a labour provider unit.

In the wake of the Morecambe Bay cockle pickers’ tragedy, the government is
keen to bust the gang masters who supply cheap, and often illegal, casual
labour. Any company that takes on casuals could unwittingly be in danger. It’s
been rumoured, in fact, that two high street chains have already been raided.

“I think FDs have to take a careful look at their risk management,
particularly in relation to staff hiring – permanent or casual – payroll systems
and expense claims,” Bullock advises. “Just don’t assume it is all ticking over.
Be absolutely rigorous and have risk management systems in place.

“A raid can damage reputation and be hugely disruptive to business and
morale. If they take computers and software away, it can be chaotic.

“So get as close to your new HMRC officer as you possibly can, and find out
what his or her agenda is. You might think a raid will never happen to you
because you’re wholly innocent, but the fact is, they can and do take place,”
warns Bullock.

This article originally appeared in the March 2005 issue of Financial