Do you know where the tax risks are in your business?

Many tax and finance professionals will have noted a trend in recent years, whereby there is greater emphasis on the processes and controls in place to ensure good tax governance.

As a consequence, many large and owner managed businesses are increasing their focus on tax governance, ensuring robust processes and controls are in place; the emphasis is now on ‘how’ tax compliance is dealt with and making sure the right amount of tax is paid at the right time.

The on-going COVID-19 pandemic has accelerated this process, as finance teams have been forced to proactively manage their cash flows, while also reassessing the robustness of their working practices, systems and controls. In some instances, processes and controls based around physical proximity of staff have been shown to be out of date and in need of re-designing.

Ensuring that there is tax integrity within your business is now critical and reflects the wider changing climate in which businesses and tax advisors now operate. Factors influencing this trend include:

• significant amounts of change in the tax regime, both domestically and internationally
• digitisation and new technologies leading to new business models and ways of selling goods and services to customers
• tax authorities focussing on the use of technology to provide real time reporting, for example Making Tax Digital for VAT and Coronavirus Job Retention Scheme claims to HMRC
• finance departments being tasked with providing certainty over the integrity of all taxes
• the implementation of the corporate criminal offence regime, which potentially carries an unlimited fine for all businesses that fail to implement reasonable procedures to prevent the facilitation of tax evasion
• the recent DAC 6 EU regulations requiring the reporting of tax schemes

Tax has also become a reputational risk to businesses. Organisations now operate in a world where tax is considered a moral issue and is front page news. Consequently, many boardrooms and owner managers are focused on ensuring that they do not face negative publicity from their tax affairs.

This trend is expected to continue with increased scrutiny by the media of the taxes paid and claims made by companies in the wake of the COVID-19 pandemic and the punitive measures being taken by HMRC to challenge tax evasion and difficult economic times.

Robust processes and controls can also make it easier for your business to adapt to change. This could be change within the business such as new supply chains or entering new markets, or it could be change driven by external factors, such as changes in tax legislation or events such as Brexit.

The impact of poor governance

Over the last few years HMRC’s powers have increased with the introduction of new information and data gathering powers and with the greater use of technology to identify those people and organisations who are understating and underpaying their tax liability.

As well as receiving information from overseas tax authorities, HMRC’s Connect Computer System, which is essentially a supercomputer, draws huge amounts of data and information from numerous sources including tax records, online platforms, social media information, government departments and websites, bank data and web browsing information to build up a complex ‘tax picture’ on organisations and individuals.

With such a rich source of data HMRC have the ability to evaluate and determine if there are inconsistencies in the tax information which is declared as part of return filings.

As a consequence, those businesses that have received HMRC enquiries over the last couple of years which lead to adjustments, enter into tax planning schemes or take a more aggressive approach to minimising their tax are generally considered to be of higher risk from a tax authority perspective.

Where an enquiry is opened this will typically lead to additional management time being required to justify to HMRC the tax positions taken. If HMRC are successful at arguing that tax adjustments are required then this could lead to the organisation suffering penalties and late payment interest.

We are consequently seeing an increasing number of businesses recognising the merits of keeping a “risk register” of known tax risks that the business is managing. This can help to mitigate or negate the risk of unexpected tax costs, as well as demonstrate to HMRC that the business is proactively assessing and complying with its tax obligations.

As HMRC’s internal machinery and enquiries in relation to corporate criminal offence start to further bite, this will become of increasing importance. Areas of particular focus may include those organisations which have overseas employees, operate in different countries, operate in high risk sectors, have sales teams with lots of discretion or have sales based reward structures.

Some recent examples

A starting point to undertaking a tax governance risk assessment is typically to assess the business’s overall tax risk covering a number of areas. These will typically consist of looking at the business’s: inherent, corporate, vat, employee and international tax risk, to build up an overview profile of the business’s main areas requiring further attention and consideration.

Over the last couple of years we have assisted a number of clients across various sectors with their governance, systems and processes reviews. Some examples of recent reviews include: