Out-Law News | 10 Dec 2015 | 11:49 am | 4 min. read
Draft legislation introducing the requirement has been included in the 2016 Finance Bill, and will come into force on the date that the bill receives Royal Assent, according to a policy paper published by the government. It has, however, dropped plans to give a named individual at board level accountability for publishing and updating the strategy. Responsibility will instead sit with the board as a whole.
"Over three quarters" of respondents to a government consultation disagreed with the individual accountability proposal, according to a summary of responses (33-page / 298KB PDF).
"Instead, the majority of respondents were of the view that accountability should rest with the Executive Board as a whole as this would be consistent with UK company law, and with corporate governance generally, and reflect the fact that a tax strategy is a 'company rather than individual' matter. The government notes and accepts this view," it said.
Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-law.com, said: “The revised proposals are much more workable than the original draft, although it remains to be seen whether the requirement to publish a tax strategy will make any meaningful difference to companies’ attitude to tax planning – in our experience, many large corporates have already turned away from aggressive schemes".
Affected businesses will be required to publish their tax strategy "in so far as it relates to UK activities" annually, and to publish this online. The strategy must include the UK group's approach to UK tax risk management and governance; the attitude of the corporate group as a whole to tax planning as affecting UK taxation; the level of risk in relation to UK taxation that the corporate group is prepared to accept; and the group's approach towards its dealings with HM Revenue and Customs (HMRC).
The draft legislation makes it clear that the measure will apply to partnerships as well as companies. Heather Self said: "Large partnerships will also be required to publish their tax strategy. This is likely to include investment partnerships and private equity funds, as well as major accounting and law firms. Since partnerships are generally transparent for UK tax purposes, it is hard to see that a partnership, as opposed to the partners, will easily be able to define its approach to tax planning."
”Non-publication of an identifiable tax strategy, or incomplete publication of a strategy that does not cover all four of the required areas, may result in a financial penalty," the government said. This penalty would be subject to the usual HMRC appeals process, it said.
The government has dropped a proposed requirement for companies to publish whether the UK group has a target 'effective tax rate' (ETR), following feedback to its consultation exercise, it said. This was partly because businesses were unlikely to have a 'UK-specific' ETR, and partly because any ETR could be commercially sensitive information, it said. Instead, the government will adopt "a flexible, principles-based approach" that "will minimise the risk of businesses publishing sanitised 'generic' tax strategies", but which will allow businesses to publish a target UK ETR if they chose to do so, it said.
Affected businesses were likely to experience "one-off compliance costs" as they adapted to the new rules, the government said. However, it said that many would already have an "existing, well-articulated tax strategy in place, even if not already in writing". It has estimated the cost of creating a tax strategy from scratch, including the necessary professional support, as around £5,000.
“The estimated compliance costs are woefully understated, and take no account of the internal time which will be taken up in ensuring that the measures are fully implemented and properly disclosed. Using such a meaningless low figure shows that HMRC has a long way to go to fully understand business governance processes,” Heather Self said.The tax strategy requirement is part of a package of measures put forward by the government in July to improve the tax compliance of the 2,000 businesses whose tax affairs are overseen by the Large Business Directorate (LBD) within HMRC. These are businesses with a turnover of more than £200 million and/or a relevant balance sheet total of more than £2 billion for the preceding financial year.
The government will also proceed with a "narrowly targeted special measures regime" for businesses overseen by the LBD that persistently undertake aggressive tax planning, or that refuse to engage with HMRC in an open and collaborative manner, it said.
Self said that businesses placed under these ‘special measures’ could now face harsher penalties if unpaid tax is attributable to ‘a speculative interpretation’ of UK tax law by the business in question.
“The new terms effectively leave HMRC as judge, jury and executioner on these businesses’ approach to tax. The Revenue has given itself complete discretion to decide what is a ‘speculative’ interpretation of the law by businesses and what isn’t – that is a very subjective judgement and is likely to result in some very contentious penalties when it is used,” she said.
“Aside from that, use of ‘special measures’ does make sense- it is quite reasonable that HMRC wants to clamp down on large businesses which persistently engage in aggressive tax planning," said Self.
HMRC will also develop a 'Framework for Cooperative Compliance', setting out common principles and ways in which it will work with large businesses to ensure that the right tax is paid at the right time, which is scheduled for introduction in April 2016. The original proposal was for a 'Code of Practice' but the government said that respondents had criticised the fact that the proposals were missing an element of mutuality as they did not outline what large businesses could expect of HMRC. The government said it intends to consult further on the final content of this in the next few months.