With a new era of tax reporting upon us, Kevin Hindley of Alvarez & Marsal Taxand UK LLP examines how businesses should approach the publication of their tax strategy, and outlines the key challenges for company boards
The end of 2017 marks a stark deadline for around 2,000 largest businesses in the UK – new rules are coming into force, making it mandatory for large businesses to publish their tax strategy and approach to tax planning every financial year, with a penalty regime in place for those companies that fail to comply.
The past few years have seen increased tax-related pressure mounting on large businesses from ethical consumers, social justice campaigners and politicians. As part of the base erosion and profit shifting (BEPS) initiative, the Organisation for Economic Co-operation and Development (OECD) sought to address these concerns around international transparency through the introduction of country-by-country reporting, without requiring any public disclosure.
The UK government, however, decided to go one step further by introducing legislation that obliges the largest businesses to publish their UK tax strategies on an annual basis.
Naturally, affected businesses will be inclined to err on the side of caution when it comes to public disclosure of their tax affairs, particularly due to commercial sensitivities. However, given the new form of public scrutiny, failing to fully comply with the detailed requirements can result in significant reputational fallout, especially as companies are becoming increasingly aware of “negative view of tax avoidance”.
Scope of the new regime
The new rules can apply to standalone companies, partnerships, UK groups (including sub-groups) and multinational enterprise (MNE) groups.
In the case of UK parented groups and UK subsidiaries of foreign headquartered groups, the rules will apply when either aggregate UK turnover exceeded £200m for the previous year or when the aggregate UK balance sheet total exceeded £2bn on the last day of the previous period.
In the case of MNE groups, where there is a UK entity or sub-group that does not exceed a threshold in its own right, it will still be in scope when the worldwide group exceeds the OECD Country-by-Country Reporting framework threshold of €750m.
In practice, this means that any group that currently falls within the Senior Accounting Officer (SAO) regime will almost certainly find itself affected. Furthermore, because of the additional rules for MNE groups, there are likely to be some relatively small UK subsidiaries of major global organisations that will now have to devise and publish a local tax strategy.
While it is true that a number of companies already publish their tax strategy, these are usually global tax strategies, and will therefore have to devise an additional UK-specific tax strategy in line with the new rules.
Detail of the regime
The government has published guidance, which outlines the key areas that a group or company should be expected to adequately address and set out in their tax strategy – criteria that external groups are equally likely to closely scrutinise.
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Risk management and governance
The approach of the group to risk management and governance arrangements in relation to UK taxation would include specific detail on how the business identifies and mitigates inherent risk, the governance framework alongside the level of oversight given to tax matters by the board of directors, and a high-level description of the systems and controls that have been put in place to manage tax risk. Additionally, this may also contain a high-level description of the key roles and responsibilities associated with the group’s tax affairs.
Attitude towards tax planning
This should outline the drivers of tax planning and the weight given to these in formulating tax strategy. HMRC will also expect an explanation of the group’s approach to planning, an explanation of why tax planning advice may be sought externally and details of any code of conduct that has been put in place.
Acceptable level of risk
The guidance concerning what the tax authorities would expect to see in order to provide adequate disclosure to satisfy this area of the requirements is fairly limited. The likely content would include an explanation of whether the group’s internal governance is prescriptive on levels of acceptable risk and, if so, how this is quantified and how this is affected or influenced by stakeholders.
Approach towards dealings with HMRC
Most businesses within the scope of the requirements will have a customer relationship manager (CRM) who should already be familiar with the group’s approach. Notwithstanding this, it is necessary to articulate how this relationship works so that the general public can understand how the organisation works with the authorities to meet its compliance obligations, deals with uncertain positions and resolves disputes. It should include a description of how the business works with HMRC on current, future and past tax risks, tax events and interpretation of the law.
Transparency and timings are paramount
One of the most significant underlying pillars to the new rules is the requirement that the tax strategy must be published online as a separate document or a self-contained part of a wider document. It must be accessible to the public, free of charge and must remain available until the company’s strategy for the following year is published.
The deadline for initial publication is the end of the first financial year that falls within the new rules. For companies that prepare their financial statements on a calendar year basis, the deadline for initial publication is therefore likely to be 31 December 2017. Thereafter, the strategy will need to be published annually no later than 15 months after the publication of the previous period’s strategy.
Challenge for the boardroom
There are obvious financial penalties for companies that fail to publish a comprehensive tax strategy that meets the legislative requirements within the prescribed period. However, these penalties are modest compared with the potential commercial and reputational implications of being publicly identified as an organisation that does not take its tax obligations seriously.
While many companies will find the new requirements onerous, it is crucial that any published strategy speaks to all the existing stakeholders. It is a job for the board of directors, who will need to work together to carefully consider how to balance external and third-party interests and concerns with their duty to the company and its shareholders.
Kevin Hindley is managing director at Alvarez & Marsal Taxand UK LLP. He has 18 years of experience in corporate and international tax, and works with multinational companies active across the globe, with particular expertise in the UK, US and European jurisdictions.