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

Today’s landscape

Simon Crookston, Partner, Corporate Tax 
09/11/2020
Cornwall rock beach

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 In some instances, processes and controls based around physical proximity of staff have been shown to be out of date and in need of re-designing.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:

Business overview

Steps and benefits

Vehicle equipment manufacturer
  • Expanding rapidly in Europe and globally with 70% of the businesses sales from overseas.
  • The rapid expansion led to some tax integrity concerns around the business’s VAT, corporate tax and employment tax obligations being able to keep pace with commercial expansion of the business.
  • A supply chain review was undertaken to identify and document where potential VAT supply chain problems existed so action could be taken.
  • Identification and rectification of permanent establishment issues that had potentially been created.
  • Business education programme on how to proactively identify and manage tax integrity matters for future expansion opportunities. 
Independent boarding and day school  
  • The school required an employer compliance review to get comfort that the organisation had appropriate processes and controls in place to correctly account for all employment taxes due.
  • Identification of risk areas and establishment of a remediation plan as to how the organisations processes and controls could be improved.
Airport operator
  • Had concerns over its UK VAT and employment taxes position.
  • Required an independent review of their processes and controls to ensure the group was correctly accounting for the taxes due. 
  • Identification of potential risk areas.
  • Formulation of an implementation plan.
  • Implementation of changes and submission of appropriate disclosures to HMRC

What should I do now?

As all businesses are different and dynamic unfortunately there is not a ‘one size fits all’ approach to managing tax risk and the development of robust processes and controls. However, from our experience, here are few example areas for consideration to ensure your processes and controls are robust:

  • Do you have a process in place to identify changes in the tax regime that are relevant to your business? Similarly, what is the process whereby the finance/ tax team find out about new developments within the business?
  • What systems are used in your tax compliance and is the output provided ‘fit for purpose’ or does it require significant manual manipulation?
  • How robust are your accounting and tax processes and procedures and where are the risk areas if the finance team is operating from home or remotely?
  • Is remote working increasing your organisation’s vulnerability to cyber-crime?
  • What training are the staff involved with taxes given? How often is their knowledge refreshed / kept up to date?
  • Who has review and sign-off responsibilities for tax returns to ensure that the numbers to be submitted are accurate and that any payment due is made on time?
  • What links are in place with the commercial teams that develop new products or win new business to ensure that new sources of revenue are treated correctly for tax purposes?
  • New overseas activities can commonly lead to unexpected tax consequences. What processes are in place to consider the corporate tax, VAT and employment tax implications of undertaking activities abroad? This review should ideally be undertaken before the activities commence.

Clearly, these are just examples and in order to get a good overview of the tax risk areas across your business - a more thorough and detailed review is required.

A starting point is to consider the main tax areas of your business (these are typically corporate tax, VAT, employment tax and international matters) and to undertake a high level risk review of these areas. This can be done by way of a manual review or by the use of a technology tool, such as a Tax Integrity Scorecard, to provide an assessment of the level of tax risk from low - high in each tax area.

Take part in our scorecard

Tax Integrity Scorecard

We have developed a Tax Integrity Scorecard which can be used for this purpose. It can help businesses understand their UK tax risks and assist them in prioritising where to focus their resources to guard against unexpected tax costs, adverse publicity and to improve tax process efficiencies.

Use our free Tax Integrity Scorecard now. The questions only take a few minutes to complete and once completed you will receive a PDF report highlighting the level of risk in each tax area. These risk areas can then be proactively considered and further investigated by the business.

This article was first published by Global Banking & Finance Review.

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Simon Crookston
Simon Crookston
Partner, Corporate Tax
Kent