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 organisations are increasing their focus on tax risk and 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 COVID-19 pandemic, Brexit, increasing inflation, global tensions and shortages of raw materials has accelerated this process, as finance teams have been forced to proactively manage their supply chains and 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and controls based around physical proximity of staff and the movement of goods across borders have been shown to be out of date and in need of re-designing.
Ensuring that there is tax integrity within your organisation is now critical and reflects the wider changing climate in which organisations and tax advisors now operate. Factors influencing this trend include:
HMRC are also seeking to continue to roll out their uncertain tax position legislation for large organisations. The rational being that HMRC wishes to reduce what they perceive as the tax gap – being what they believe should have been taxed and collected under their interpretation of the law versus what was actually collected.
Notification to HMRC will apply for large organisations - including companies, partnerships and LLPs with a turnover above £200m or balance sheet total over £2bn and will be applicable for all returns filed after April 2022. It applies to corporation tax, employment tax taxes and VAT. A notification threshold of £5m will apply.
In summary, the three triggers that require notification are:
Clearly, to be able to assess against these triggers it will be important for organisations to have integrity around their systems and reporting processes.
Robust processes and controls can also make it easier for organisations to adapt to change. This could be changes within the organisation such as new supply chains, the use of new technology platforms or entering new markets. Alternatively, it could be change driven by external factors, such as changes in tax legislation or events such as Brexit, Ukraine war or supply chain shortages which has led many organisations to re-assess their cross-border product flows and to manage labour shortages.
Tax has also become a reputational risk to organisations, as they now operate in a world where tax is considered a moral issue with headlines frequently appearing in the news with regard to how an organisation manages its tax affairs. Consequently, many boardrooms and owner managers are focused on ensuring that their tax status is seen positively by their stakeholders, employees and society and that they do not face any negative publicity from their tax affairs.
The increased daily news items on inflation, windfall taxes on energy firms, new environmental taxes and wage rises for the public sector, linked with commentaries around the measures potentially being taken by HMRC to challenge tax evasion in the current economic climate, means taxation will remain a topical area of consideration for the foreseeable future.
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.
We are already seeing an increase in enquiries from HMRC covering a number of areas from enquiries on transactions, employer compliance checks, to R&D claims - where HMRC have clearly stated they are enhancing their compliance checks to prevent abuse of the relief.
Those organisations 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.
What should I do now?
As all organisations 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:
Clearly, these are just examples and in order to get a good overview of the tax risk areas across your organisation - a more thorough and detailed review is required.
A starting point is to consider the main tax areas of your organisation (these are typically corporate tax, VAT, employment tax and international matters) and to undertake a high level tax 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.
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 as the foundation for a tax governance review.
The theme of this article was first published by Global Banking & Finance Review.