IN an age where large corporates continue to engage in tax avoidance or aggressive tax planning, compelling businesses to disclose their tax strategies is, at heart, a good idea. There is a risk, however, that measures currently being considered by government will cause commercial confidentiality issues.
Proposals put forward by financial secretary to the Treasury David Gauke last month reccommend a “legislative requirement” for all large businesses to publish their tax strategy, “enabling public scrutiny” of their approach towards tax planning and tax compliance.
A voluntary ‘Code of Practice on Taxation for Large Business’ setting out the behaviours which HMRC expects from its large business taxpayers is also put forward alongside a narrowly-targeted ‘Special Measures’ regime to tackle the “small number” of large companies that persistently undertake aggressive tax planning or refuse to engage with HMRC in an “open and collaborative” manner.
The businesses intended to be in scope for these measures are broadly those administered by HMRC’s Large Business Directorate. The Senior Accounting Officer (SAO) qualifying criteria (businesses with UK turnover over £200m and/or a relevant balance sheet total over £2bn for the preceding financial year) are expected to apply but it is not anticipated that these measures will form part of the SAO requirements.,” Deloitte points out in a tax briefing.
It’s simple, could save businesses, HMRC and the public a lot of trouble and have a significant chilling effect on aggressive and abusive tax practices by corporates.
Yet concerns exist among accountants and company directors around some of the key measures. Chief among those concerns is the emphasis on a company’s effective tax rate (ETR) – the net rate a taxpayer pays if all forms of taxes are included and divided by taxable income.
Under the proposals, companies will be required to publish elements of their tax strategy which comprise summaries of their overview of internal governance, approach to risk management, attitude to tax planning, relationship with HMRC and whether the group has a target effective tax rate, what this is, and what measures the business is taking to maintain or reach the target ETR.
But the ETR measure is proving problematic.
In its response to the consultation, the Institute of Directors has flags up some key concerns, including which businesses – the 2,000 largest, the IoD suggests – make the disclosure.
The issue the IoD raises here is that it is not explicit in the criteria that authentic tax planning is both desirable and, indeed, ought to be encouraged on the same basis that businesses seek to manage and reduce other business costs. There is, too, a real risk that a low effective tax rate is seen as undesirable when, in practice, there are many reasons why an effective tax rate might be low such as the group’s customer markets and capital expenditure commitments.
Deloitte, too, points out that companies which are part of international groups are also likely to find the UK-centric nature of the proposals “problematic” and that the ETR disclosure could cause commercial confidentiality concerns.
“Listed groups are likely to be particularly interested in the proposals to publish details of their target ETR. It is unclear whether this could say very much, given UK and overseas restrictions on what listed companies may say,” Deloitte says in its briefing note.
A voluntary code of practice is also on the table which HMRC hopes will, if followed, lead to quicker resolution of significant tax issues, increased certainty, and a reduction in disputes and litigation.
The draft code covers three broad areas of large business behaviour – openness and the relationship of the business with HMRC; internal governance, and; the approach of the business to tax planning. Unlike the code of practice already in place for banks, Deloitte doesn’t envisage that signatories to the code will be published.
However, HMRC would seek to correct factually inaccurate public statements if, for example, a business claims to be a signatory to the code but is not.
Of more concern for corporates is the special measures regime, which will hand HMRC additional powers to engage with truculent businesses and “reduce some of the rights and privileges for such taxpayers”.
HMRC currently has a High Risk Corporates Programme (‘HCRP’) which accelerates the resolution of significant taxpayer disputes and Deloitte anticipates that the businesses likely to enter the regime are those that refuse to alter their behaviours in relation to tax planning and transparency to HMRC following participation in HRCP.
“The sanctions imposed will vary depending on whether the tax payer is perceived to be deficient in transparency and co-operation; or in their approach to tax planning. In either case, a judicial decision will need to be taken as part of the process,” Deloitte says.
For transparency and co-operation deficiencies, the proposed sanctions include forcing companies to provide documentation (including tax advice, other than that expressly covered by legal professional privilege) to HMRC as a matter of course; withdrawing the provision of non-statutory clearances or informal opinions on the tax consequences of transactions; and being publicly named and shamed.
If companies are found to have tax planning deficiencies the taxman will be able to withdraw their entitlement to rely on the ‘reasonable care’ defence in penalty assessments, “effectively meaning that all non-trivial inaccuracies in the taxpayers’ returns would be assumed to have arisen as a result of at least carelessness, if not deliberate action, with minimum penalties of 30% of the tax due”, Deloitte says. They too will be pubilcy named as having been subject to the regime.
Once entered into, the special measures will continue for a minimum of two years
“There are various protocols and safeguards governing entry into, and exit from, the regime relating to the level of perceived ‘risk to the Exchequer'”, explains Deloitte.
Despite all this, HMRC itself comments that advances have been made in company compliance and transparency, causing some to wonder why certain aspects of the proposals are deemed necessary in the first place.
Indeed, some large businesses have already taken steps to improve their tax transparency, most notably Barclays and SSE. The latter last year adopted the Fair Tax Mark as it seeks to make “”a genuine effort to be open and transparent about its tax affairs”, while Barclays is now posting its tax reports on a country-by-country basis.
Overall, businesses in the FTSE 100 are becoming increasingly transparent over their tax structures. Analysis of annual reports, corporate websites, and other social responsibility reports undertaken by PwC reveals a steady increase in tax transparency across big business.
In 2012 just 32 firms in the FTSE 100 provided information on issues such as their attitude to tax planning and relationships with tax authorities. The number jumped to 49 in 2013, and has now risen to 56, based on the most recent 2014 data.
There should, though, be an emphasis for keeping these disclosures intelligible to the public at large. Too often organisations obfuscate through jargon, volume of information and complexity – either by design or coincidence – and only a hardy few ever read them in any detail, ultimately defeating the original purpose.
How this rule interacts with other anti-avoidance moves, such as the OECD’s BEPS project, country-by-country reporting and others will also be fascinating. With all that ironed out, the enforcement of that should prove fairly easy, with the publication by HMRC of the names of the groups, if any, which had not published their tax strategy a sufficient deterrent.
There is a lot to thrash out, but if satisfactory parameters can be found, it could be a powerful tool.