HM Revenue & Customs (HMRC) has recently published a consultation document entitled “Improving Large Business tax Compliance”. Although, as the title suggests, the document is aimed at larger businesses, its content is of relevance to any business that wishes to manage effectively its relationship with HMRC.
The document puts forward three proposals:
- A requirement for large businesses to publish their tax strategy;
- A voluntary ‘Code of Practice on Taxation for Large Business’; and
- A targeted ‘Special Measures’ regime to tackle a small number of large businesses that persistently undertake aggressive tax planning or refuse to engage with HMRC in an open and collaborative manner.
It is the first two of these that are of wider interest.
A recent piece of independent research conducted for HMRC found that businesses with a greater tendency to take risks tended not to have written or published strategies. Those business that do articulate their strategies can be separated into two groups; those striving to be compliant and legal only (higher risk), and those committed to operating within the spirit as well as the letter of the law.
It is not surprising, therefore, that HMRC is keen for large businesses to make their tax strategies visible. Tax strategies that are terse or focus on ensuring that the business pays no more tax than is legally required might indicate higher risk organisations, which would be subject to increased scrutiny by HMRC.
But it is not just HMRC that will have an interest in a business’ tax strategy. In the current “tax climate” customers, employees, investors and other stakeholders will wish to know where the business stands in relation to its tax obligations.
A tax strategy document would usually provide a high-level commentary on the organisation’s approach to risk management, its attitude to tax planning (eg whether the business will operate within both the spirit and the letter of the law) and its approach to working with HMRC.
The tax strategy might also say whether the business will comply with HMRC’s proposed Code of Practice on Taxation. Broadly, this would require businesses to work in a collaborative and professional manner with HMRC, be open and transparent with HMRC as regards decisions that have a significant tax impact, and avoid structures that give a tax result that’s inconsistent with the underlying economic circumstances.
All businesses will have a tax strategy, although in many cases it will not be documented. Those businesses that see paying tax as a moral duty – perhaps part of their corporate social responsibility – are perhaps more likely to wish to publicise their policies. It should not be forgotten that Tax Inspectors have access to the internet, and so publishing tax policies on the business’ website could even have the benefit of heading-off unnecessary compliance checks or enquiries by HMRC.
Historically, businesses that want to be left alone by HMRC have tended to keep as quiet as possible. In future it might instead be in their interest to become a bit more visible.