UK Tax administration: large businesses transparency strategy

HM Revenue and Customs (HMRC) is committed to dealing with all customers fairly and efficiently while making sure that the correct tax is paid to the Exchequer. HMRCʹs Large Business Directorate manages the largest 2,000 or so businesses using a risk based approach. This is due to their size and complexity, the tax at stake, and the consequent risk they present to the Exchequer.

This measure seeks to encourage tax transparency and compliance across all large businesses. To achieve this, we are introducing the requirement for qualifying large businesses to publish their tax strategy in relation to UK taxation.

This legislation will includes details of the tax strategies required to be published by such large business together with details of where and when publication is required and details of penalties for non‐compliance.

General description of the measure

The measure will introduce a legislative requirement for all large businesses to publish an annual tax strategy, in so far as it relates to UK activities, approved by the Business’s Executive Board.

The strategy will cover 4 areas:

• the approach of the UK group to risk management and governance arrangements in relation to UK taxation
• the attitude of the group towards tax planning (so far as affecting UK taxation)
• the level of risk in relation to UK taxation that the group is prepared to accept
• the approach of the group towards its dealings with HM Revenue and Customs (HMRC)

Non-publication of an identifiable tax strategy or incomplete content based on the 4 areas outlined above could lead to a financial penalty. This penalty will be subject to the usual HMRC appeals process.

Who is likely to be affected

Around 2,000 largest businesses in the UK.

Policy objective

The publication of tax strategies will ensure greater transparency around a business’s approach to tax to HMRC, shareholders and consumers. And board level oversight of those strategies will embed tax strategy in existing corporate governance processes. Taken together this should drive behaviour change around tax planning and therefore enhance tax compliance.

Proposed revisions

Legislation will be introduced in the Finance Bill 2016 to require qualifying large businesses or qualifying groups to publish a tax strategy, in relation to UK taxation, on the internet.

The legislation sets out the content required for inclusion in the tax strategy.

The strategy will need to remain accessible until the next update to the strategy, typically on an annual basis. A penalty may be chargeable either for the non-publication of a tax strategy or if the information contained within the published strategy does not meet the requirements of the legislation.

Monitoring and evaluation

This measure will form part of HMRCs business risk review processes and implementation and impact will be measured within the internal governance and risk management processes within Large Business Directorate.

• Draft clause 65
• Draft explanatory notes clause 65

How to make that change

In order to get buy-in from senior management it is often about setting the right priorities, understanding the root cause of underperforming and select a method for measurement that best fits. The deck explains what a tax function could do to get indirect tax higher on the priority list of senior management.

Is it all less challenging when change is initiated and sponsored by senior management itself? For example when the overall business framework is changed (e.g. COSO ERM) or non routine transactions are considered.

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More detail: Where you are and where you want to go

Tax engines questions to ask before you commit

Determining the VAT liability and VAT recovery of businesses’ transactions (the system’s indirect tax functionality) can be automated within Enterprise Resource Planning (ERP) systems such SAP and Oracle, or by way of a manual processes.

Multinationals run often various versions of ERP systems without harmonization. The ERP set-up is often per business unit and thus multiple kernels per country are more likely than not. In the last decade, companies have increasingly automated their business processes. The most common method is by using an Enterprise Resource Planning (ERP) system. Such a set up can be hugely complex. This is definitely the case where it relates to European based indirect tax.

As manual processes are subject to human error, automation could - under circumstances - result in performance improvements and savings.

A third party tax engine might be a solution than improving the indirect tax functionality of its own ERP systems when the organization uses multiple ERP systems.  Interfacing via a bolt-on could be an alternative.

In practice, configuration (the amount depends) is needed when companies deal cross border and/or complex business model are set up such as a centralized principal structures. This could cause difficulties in running exception reports to look for missed opportunities, under claimed VAT and potential fraudulent transactions. A lot of (manual) work is required when reconciling the periodic VAT compliance reports from these different sources (divisions, different systems).

As the ERP systems do not have flexible reporting solutions, multiple spreadsheets are often used to reconcile VAT numbers. Manual processes are subject to human error and often inefficient due to the amount of rework (‘hidden factory’).

'Remediate own ERP system' or purchase a 'third party solution’ 

Indirect Tax functionality can be automated (full or to a certain extend) in a company’s own ERP system. The problem might be that multiple ERP systems are used and that interfacing via a  third party tax engine is considered an alternative.

That option means that part of the system functionality is actually outsourced.

Some important questions from a tax software selection to ask

Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management

Operational - challenges and improvements

In practice we often see that no (or few) performance targets are set or monitored resulting issues remaining unresolved as no one feels responsible.

From a best practice perspective, we expect that targets are set and technology enabled KPIs are in place to enable frequent monitoring (formal and informal) and that these targets also relate to the interaction between tax and the business and other stakeholders.

Often we see that clear procedures for critical VAT processes do not exist and consistent evaluation criteria for VAT planning is lacking. Critical VAT information utilized for compliance, financial reporting, and other tax activities cannot be generated easily during the year. Such critical information should be available and generated frequently throughout the year to provide objective evidence and supportive arguments for business and tax decisions.

There should be a systematic approach to tax planning and evaluation criteria should exist for example how external advisers should be used. For example when corporate entities obtain advice and assistance from external advisors.

The policy could be that for example the written advice and assistance has to be in the English language and in case of material tax items the tax department is informed prior to consulting such advisors.

Tax risk management should continually influence operating decisions and strategic direction. An uniform tax risk process for a structured and consistent evaluation has to be implemented to make that happen.

Tax risk management relates to potential events, which might have an adverse effect on the goals of a company. This therefore also includes missed opportunities (i.e. savings).

The resources and budget is aligned with the outcome of the tax risk assessment. Due to limited resources time should be spent on high-risk areas.

• Indirect tax department identifies opportunities to optimize tax planning across all jurisdictions, business units and taxes
• Upon non routine significant business transactions such as M&A transactions, all indirect tax liabilities are identified prior to the transaction or implementation
• All regulatory, legal and enterprise record retention requirements are considered and all relevant indirect tax risks are taken into consideration (in consultation with indirect tax)
• The indirect tax department risk management strategy differentiates between strategic, operational, and financial and compliance risks and contains detailed action plans for managing these risks.

That means as well that the tax department has to adopt an efficient internal control framework that is fully implemented for all tax functions across the globe and reporting on internal controls is part of its performance indicators.

Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management

Change 'VAT' management

The tax function should ascertain proper implementation and determine the impact of changes in businesses, laws and regulations on implemented tax planning.

Operational changes have a tax consequence due to the change in transactional flows and the change in a company’s assets, functions and risks profile. Important is to ensure that the new operating model is not only implemented correctly from a tax perspective, but also ensures that business processes are tax aligned realizing support of the business in the areas of compliance, finance & accounting, legal IT systems, indirect tax and regulatory matters.

That means teaming is a necessity with various work streams.

Technology-related tax risk: understand and address the potential harms and benefits of (new) technology

The selling arrangement may change from a buy/sell to broker/agent or vice versa. Goods purchasing may become centralized. The flows and storage locations of goods may change. In any of these cases, new VAT registration obligations may be created in different countries. Likewise VAT could be chargeable by different entities and the recoverability of the VAT could change and different billing flows are created.

That means that tax risk management continually influences operating decisions and strategic direction and indirect tax professionals are appointed to support multidisciplinary teams in projects and programs. That should ascertain timely input from indirect tax function before transaction, changes in activities, operations, structure and ensuring that unacceptable tax risks will be prevented where possible.

VAT should be considered in every aspect of the migration process, from concept through completion and beyond. Managing by design — looking at any process or transaction from end to end and factoring in all the requirements and controls essential to designing and optimizing a compliant VAT process.

Written by Richard Cornelisse, one of the articles published on Global Indirect Tax Management