Implications of the Free Trade Agreement with the EU for DAC 6
Do you know where the tax risks are in your business?
Profit-fragmentation rules - The new tool in HMRC’s armoury
VAT pitfalls: prevention better than cure
Withholding taxes: actions for groups with UK and EU members
As organisations increase 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.
Our tax integrity services reflect the changed climate in which businesses and tax advisors now operate; tax has become an emotive and high profile subject thanks to significant reporting in the media, punitive measures being taken by HMRC to challenge tax evasion and difficult economic times. The trends in recent years include:
These trends were further endorsed by the Chancellor in the Budget 2020 where he announced additional Tax Integrity measures.
The Senior Accounting Officer (SAO) regime is overseen by HMRC and applies to all ‘large companies’. This includes UK incorporated companies with a turnover in excess of £200 million in the preceding financial year and/or a balance sheet total of more than £2 billion.
The limits have not changed since the SAO rules were introduced 10 years ago. With the shift in the focus on tax integrity, it is likely the threshold limits will be reduced in due course to bring more organisations into the net.
The SAO of the organisation has
to certify that the company, and each of its subsidiaries, establishes and
maintains 'appropriate tax accounting arrangements'. In practice, this focuses
on 'how' the business manages its tax obligations and in particular, the
process and controls in place to ensure that the right amount of tax is paid,
at the right at the time.
The SAO can be personally liable for incorrect or incomplete declarations and we have started to see HMRC taking action against individuals with a recent dispute having been heard by the tax tribunal.
With the increased focus on tax governance and the integrity of data, some organisations who are not within the regime are starting to adopt an SAO best practice governance approach.
Our team advises businesses on
how they can embed a good governance approach.
Many large and owner managed businesses are increasing their focus on good tax governance, ensuring robust processes and controls are in place; the emphasis being 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 and Brexit has further speeded up this process, as finance teams have been forced to proactively revisit whether their compliance systems and processes are fit for purpose and robustness.
We have also seen a recent shift in HMRC’s approach, as they have sought to draw on huge amounts of data from numerous sources, including information from: tax records, the internet, banks, government departments and other organisations 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.
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.
Many clients are now seeing a tax health check as a sensible approach to take stock of their current position and to provide a platform from which they can start to proactively managing their ongoing tax affairs.
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:
Our multi-disciplinary team of tax specialists can help assess your tax compliance procedures and governance position. Providing you with a roadmap of where you are now and what actions are required to improve your compliance and governance position.
Our tailored approach is flexed to individual client circumstances, although the key elements of our tried and tested approach typically include:
We were asked to undertake a health check review of the affairs of this new client. Our review identified large errors in a number of their taxes, including: VAT, corporation tax and P11D's. We assisted the client revisit their previous tax filings, identify the tax exposure in each of the areas and make a voluntary disclosure to HMRC.
The business was able to proactively become compliant, bring its tax affairs up to date and change its systems and processes to ensure compliance going forward. This provided comfort to the stakeholders of the business and reduced their exposure to penalties and fines from HMRC.
As a consequence of staff changes the business had identified they may have a problem with the way they were treating their drivers from a tax perspective. We were asked to undertake a health check review to ascertain the historic position, identify the potential tax risks and to assist the business implement more robust systems to identify and deal with self-employed / agency drivers.
The business was able to identify and quantify the tax risks and remedy the situation proactively and appropriately with HMRC. We conducted an IR35 review of their existing agency drivers and helped the finance team understand the requirements for when they needed to clarify the position for future workers. This provided the shareholders with comfort that their employment tax obligations were in order.
The Corporate Criminal Offences Act of failing to prevent the facilitation of tax evasion came into force on 30 September 2017.
The provisions allow for the criminalising of corporate entities (including partnerships and LLPs) that do not do enough to prevent the facilitation of that evasion by the entity’s employees, contractors and agents.
To defend themselves from a potential liability organisations must be able to show they have reasonable procedures in place to prevent the facilitation of tax evasion.
HMRC are now actively seeking to enforce the legislation. As at 31 July 2020, HMRC had 31 investigations under review across 10 different business sectors including financial services, oil and gas, construction, labour provision and software development. This is in addition to the 33 reviews already undertaken. The reviews cover the full spectrum of businesses from small business through to some of the UK’s largest organisations.
The number and spread of investigations clearly demonstrate that HMRC is actively enforcing the legislation across all tax and duty regimes and their focus covers organisations of all shapes and sizes.
Our role can vary according to the requirement of the individual organisation.
Our multi-disciplinary specialist team from tax and forensic accounting advise clients on how they can ensure compliance with HMRC’s requirements.
A key element of our approach is being able to demonstrate to HMRC that a firm has actively sought to put reasonable prevention procedures in place. These include:
We have created a new online tool that will allow you to quickly provide a basic assessment of your organisation’s intrinsic level of risk and vulnerability to prosecution for the Corporate Criminal
Using your answers to a number of questions, a score is generated giving an indication of the level of risk and potential actions you can take to mitigate these risks. You will then receive a PDF of the outputs to take away and consider. Offence.
Our specialists have a detailed understanding of the Corporate Criminal Offence, how to use the tool effectively, and how to help you understand and manage your results.
Start the scorecard
There are requirements for certain large UK organisations, those with £200 million of turnover and / or balance sheet assets of greater than £2 billion in the previous year, to publish a UK tax strategy on their website.
For most organisations this takes the form of a set of guiding principles that is approved by the board and which demonstrates the business’ approach to tax risk and governance. This includes:
HMRC can impose financial penalties on organisations that fail to comply with the requirements to publish their tax strategy on their website.
Our team can help advise your business on development of their tax strategy, ensuring that your strategy:
Update: UK moves from DAC 6 to OECD Mandatory Disclosure Rules (MDR) - read our insight
The EU directive known as DAC 6 has a similar aim to the UK’s existing Disclosure of Tax Avoidance Schemes (DOTAS) regime, but will catch cross-border transactions including many which have real commercial substance and no tax avoidance motive.
The directive is designed to tackle tax avoidance and promote tax transparency by introducing an obligation on intermediaries to disclose cross-border tax arrangements. This will allow different tax authorities to exchange information on potentially aggressive tax structures. The UK will sign up to DAC despite our withdrawal from the EU. Consequently, cross-border arrangements involving at least one EU Member State or the UK will need to be reported if they meet one of the ‘hallmarks’. From a UK perspective, DAC 6 covers all EU taxes other than VAT, customs duties, excise duties and mandatory social security contributions.
Due to COVID-19 the European Commission has announced a proposed extension to the original timetable. The implementation of the extension means:
DAC 6 applies to any person (including an individual, partnership, company or other legal entity) operating in the EU or with interests in the EU. It applies to multinational companies, but equally could apply to intermediaries such as law firms, accountants, banks and financial advisors.
HMRC have recently updated their guidance on DAC6, although there is still some uncertainty on about how DAC will apply in practice. In the meantime, our team can advise your business on:
Getting ready for DAC: A guide for taxpayers
DAC 6: New EU tax Mandatory Disclosures Rules
What help did they require?
What did this mean for the client and the benefit gained?
The organisation has a strong focus on governance. As part of their internal risk management processes, and aiding compliance with the SAO regime, the finance team are required to:
We supported the business in reviewing both the controls they have identified and the risk determination of the UK taxes.
We are working with the business to provide ongoing monitoring and to updating the risk registries for changes in the business or the UK taxes regime. The taxes in scope for our work included direct tax, indirect tax and employee taxes.
The UK finance team lacked resource to carry out a one-time update which we achieved for them.
Our approach enables them to stay on top of changes. Our work also means that there is significant documentation in place evidencing the reviews that have been carried out to allow the SAO to sign the next SAO certificate.
A UK VAT and employment taxes risk review.
The emphasis of the review was on the processes and controls in place to ensure that the group is correctly accounting for the taxes due.
Our work involved reviews of the relevant processes followed by all individuals involved with VAT and employment taxes. We met with key stakeholders, reviewed the tax process documents and carried out our own testing.
Our deliverable was a ‘traffic light’ exceptions report highlighting where remedial actions were needed and our recommendations for how the processes and controls could be improved. We then worked with the business to implement changes and to submit disclosures to HMRC as appropriate.
A UK employment taxes risk review across their UK business. The emphasis of the review was on the processes and controls in place to ensure that the business is correctly accounting for the taxes due.
The new FD in post was the driver for the review along with a change of auditor.
Our work involved two days on site to understand the key employment tax risks they have within the business and how they managed these. We met with key stakeholders, reviewed the tax process documents and carried out our own testing.
Our deliverable was a ‘traffic light’ exceptions report highlighting where remedial actions were needed and our recommendations for how the processes and controls could be improved.
We have then continued to work with the charity to help them consider in more detail some of the key risk areas identified and to support them implement the necessary changes.
In order to help ensure the school was compliant from an Employer Compliance perspective they asked us to undertake an employment taxes risk review across the two sites they operate from.
The emphasis of the review was on the processes and controls in place to ensure that the business is correctly accounting for all employment taxes due.
Our work involved a site visit to understand and provided assurance in relation to the key employment tax risks they have within the school and how they managed these.
We met with key stakeholders, reviewed the tax process documents and carried out our own testing.
Our deliverable was an exceptions report which visually highlighting where remedial actions were needed and our recommendations for how the processes and controls could be improved.
After the review we continued to support the school to help them consider in more detail some of the key risk areas identified. We developed a remediation plan to assist them implement any necessary changes.
The business has expanded rapidly both within Europe and globally, with 70% of the businesses sales from overseas.
The rapid expansion has led to the businesses internal processes and controls in relation to VAT, corporate tax and employment tax matters not keeping pace with the rapid expansion. Some potential global compliance tax integrity concerns were therefore being raised by finance.
We assisted with a tax supply chain and permanent establishment review.
The focus of the review was to identify potential VAT problems within their supply chain, particularly as a consequence on Brexit.
The permanent establishment review, in conjunction with our Crowe Global network, was to identify where potential permanent establishment risks had been created from a corporate tax, VAT or mobility perspective.
Our tax supply chain review identified and documented where potential VAT supply chain problems were, so that the finance team could take the appropriate action.
Our permanent establishment review sought to identify and rectify the permanent establishment issues that had been potentially be created. We reviewed the underlying facts and circumstances, and arranged for appropriate tax compliance filings in the respective countries as required.
We also met with the key stakeholders of the business to educate them on what actions may lead to a permanent establishment being created. Enabling such matters to be considered proactively as part of any future expansion plans.