Tax compliance doesn’t get any easier. According to figures compiled by
theWorld Bank, the number of pages of tax law in the UK has more than doubled in
the last ten years from 3,700 to 8,300. So it’s not surprising that most finance
directors complain about the amount of resource they have to devote to the work.
But could an ambitious raft of reform that HM Revenue and Customs is in the
process of introducing make a change to that work burden? In November last year,
Sir David Varney, the former chairman of MMO2 and chief executive of BG Group,
presented his eagerlyawaited recommendations about HMRC’s relationships with
large businesses. Sir David urged HMRC to widen the advanced rulings process
which enables companies to get tax clearance for major investment or corporate
He suggested HMRC should take a “more transparent approach” to risk
assessment by looking at how businesses themselves identify and manage tax risks
as a means of targeting interventions where they will make most impact. And he
also said HMRC should “take the business perspective into account in everything
it does – giving earlier clarity and reducing complexity and administrative
burdens for business”. Chancellor Gordon Brown has announced he is adopting the
regulations in full. So tax compliance utopia can’t be far off.
Well, not quite. For a start, despite the good intentions behind the Varney
report – officially called Review of Links with Large Business – there are
serious doubts in the accountancy profession about whether HMRC, as at present
resourced, is really geared up to deliver on the promise and take the pledge to
widen the currently quite narrow advanced rulings process.
Wait and see approach
“It is a labour-intensive process,” says Paul Harrison, head of KPMG’s tax
management services. “If they intend to widen it to pretty much anything you
want to get a view on, then they could create a huge amount of work for
themselves. It is difficult to say right now precisely what the results of that
regime will be.” And Mark Schofield, a corporate tax and international tax
partner at PricewaterhouseCoopers, adds: “I think there are going to be more
things that people will want to clarify because the nature of commercial
transactions is more complex as business becomes more complex.” So could the
advanced rulings process become a frustrating bottleneck for FDs under pressure
to complete deals yesterday?We shall have to wait and see.
Then there is the risk-based approach to tax. In fact, this is already
underway, using the newly-created customer relationship managers in the Large
Business Service, which HMRC created to handle dealings with the 2,500 largest
enterprises in the UK (that account for nearly half of all the corporate
In theory, it seems sensible to focus attention on those companies where a
range of factors – that could include an aggressive view of tax planning and a
lackadaisical approach to tax processes and accounting – mean that HMRC is
unlikely to be receiving the revenue that is its due.
The trouble is that there are doubts among senior accountancy practitioners
about whether the approach is really much more than a box-ticking exercise.
As a result, some companies could end up with a risk rating with which they
fundamentally disagree. That could prove significant if HMRC – as seems likely –
chooses to target companies with higher risk ratings for more compliance
“I think the approach is a very superficial risk analysis and assessment.
And I think it has prompted some quite difficult and, possibly what will be
protracted, discussions about whether they are right,” says Conrad Young, head
of Deloitte’s UK tax compliance and reporting business.
Young is critical that the criteria HMRC is using for risk assessment mixes
up both the objective (such as the effectiveness of the company’s compliance
system) and the subjective (such as the degree of co-operation of the taxpayer
and whether the company adopts aggressive tax planning).
Source of tension
“I am not sure that, at this stage, HMRC has taken risk assessment down to a
level of detailed understanding,” Young says. “I’m not sure the population of
client relationship managers are generally equipped and experienced to make the
sort of assessment they’re being asked to make. And I’m not sure how they get
the evidence on which to base their assessments.”
Harrison agrees that the risk assessments are proving a source of tension
between HMRC and some of the companies it deals with. “I have spoken with
companies where the perception is that HMRC’s risk profile is not in line with
their own view. Nobody has yet seen in detail their risk assessment, but I think
expectation gaps are appearing.”
But Schofield argues that risk profiles could prove a benefit to companies in
the end. “I think the positive thing about risk profiles is that, if things
aren’t right, you can sit down and have a debate with HMRC about it. If you
don’t have a risk profile, then views can build up in tax inspectors’ minds
about where risks exist – and there is no opportunity to dispute that view.
Having debate and discussion should mean that over a period of time both HMRC
and the company can agree on a risk profile.”
That may be the case with the majority of companies among the 2,500 but it is
difficult to see those firms that are handed a high risk profile being happy
with the outcome – particularly as this could mean an increase in the
administrative burden of compliance if, as a result, HMRC interventions become
more frequent and intrusive.
But, perhaps, that could be a price worth paying if the admin burden of tax
compliance lessens for the rest. But will it? Last year, HMRC hired KMPG to
calculate the cost of tax compliance as a way of discovering a benchmark against
which future changes could be judged. KPMG calculated the burden of tax admin as
0.45% of GDP.
Since then, HMRC has said that it aims to cut the burden on business of
dealing with its forms and returns by at least 10% in five years. It hopes to
cut the burden of dealing with its audits and inspections by at least 10% over
three years and 15% over five. Whether HMRC will achieve these targets is
anybody’s guess. And whether many FDs will notice the difference even if they do
Closing the ‘tax gap’
That is because HMRC is bound to continue pursuing its vigorous approach to
closing the ‘tax gap’ – the difference between the amount of tax that is due on
a given volume of economic activity, if taxpayers comply with both the letter
and the spirit of the law, and the amount of tax actually collected from that
economic activity through the operation of the normal tax collection processes
and recovery action – as HMRC defines it.
The idea of FDs having matey discussions with HMRC’s friendlysounding
customer relationship managers may sound reassuring, but the CRMs are likely to
be on the lookout for any information that might suggest the company ought to be
paying more tax.
Which means thatmany FDs could benefit from taking a fresh look at their
compliance processes and procedures.
Those FDs who want to reduce the compliance burden need to do it themselves
rather than rely on dubious promises about fewer forms and tax inspections. One
key issue for the immediate future is to explore ways of converging the
accounting and tax processes. In the past, the two have usually been separate
whichmeans a lot of work abstracting data from accountancy systems and reworking
it for tax accounting and returns. FDs who can bring those processes together
should achieve some big wins in the compliance administrative burden.
Schofield agrees that having an efficient process for gathering the numbers
needed for tax returns is at least half the battle in developing a best practice
compliance function. But he also argues that it pays to go back to basics.
“For me, tax compliance goes back to a fundamental proposition – which is
about companies understanding what their tax obligations are and how they
aremanaging those obligations,” he says. “It’s about knowing what things you do
that trigger a tax liability and working out how you are going to capture that
information, disclose it appropriately and pay the right amount of tax.”
BOX: Too difficult
Complexity and compliance are bigger problems for UK businesses than the
corporation tax rate itself, according to a recent survey.The Confederation of
British Industry asked FTSE 350 and foreign-owned companies of the same size for
their views on the UK tax regime. Most respondents said that it was important to
address the complexity of tax rules (89%) and the compliance burdens and cost
(70%) in order to increase UK competitiveness.
Only 43% said it was important to change the corporation tax rate.
BOX: Technology for tax
Information technology could play a larger role in helping finance directors
manage tax compliance – if only they would let it. But according to a new survey
of 200 large and medium-sized companies by KPMG*, 39% aren’t using tax
One company that does is scientific journal publisher Reed Elsevier. It has
automated the process to calculate the correct indirect tax on sales in more
than 100 countries.
The Reed approach is typical of many companies that have so far turned to
technology to aid tax compliance – identify a particularly complex part of the
compliance process and apply IT to it.
Yet, in fact, tax compliance software from a growing range of suppliers such
as Taxware, Abacus and Vertex, is now sufficiently mature that it could be
applied much more generally, if only FDs were willing to do so.
Software systems tend to range from simple form-fillers up to allembracing
systems that automate the compliance process.
The KPMG research suggested that those FDs who do apply IT to compliance,
target two main areas.They automate the link between accounting and tax systems
(3% of the companies in the survey) and/or install a tax reporting tool to
monitor processes and controls (25%).
There is less use of “full tax sensitisation” of the accounting system (12%),
tax warehousing and data analysis (10%) and technology-enabled tax risk reviews
Yet cynical FDs, over-sold on the benefits of IT too often in the past, should
park their scepticism on this issue.When it comes to tax compliance software,
there is a positive gulf between experience and perception.
For example, 94% of finance managers who have used IT to create a direct link
between accounting and tax systems rate it “very” or “quite” useful.While only
48% of those contemplating use of the technology rate its likely benefits so
It is also significant that tax managers are more sold on the potential
benefits of IT than FDs. For example, 73% of the tax managers think an automated
link between accounting and tax systems delivers big benefits compared with 65%
of finance managers.
Seeing the light
Until now, FDs wanting to automate tax compliance have had to turn to
specialised software providers.
Tax compliance has often been a blind spot in the enterprise resource
planning (ERP) systems that have become a kind of IT virility symbol in most big
That could change in the next couple of years if the largest ERP players,
such as SAP and Oracle, see commercial sense in adding more comprehensive tax
compliance facilities to their offerings. If that happens, it’s likely to make
reluctant FDs willing to use ITenabled tax compliance more widely.