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.

What is good tax governance?

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.

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and controls based around physical proximity of staff and the movement of goods across borders have been shown to be out of date and in need of re-designing.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:

• 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 manage tax risk and provide real time reporting, for example Making Tax Digital for VAT
• finance departments being tasked with providing certainty over the integrity of all taxes (through SAO requirements)
• 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

What is an uncertain tax position?

The uncertain tax position legislation for large organisations was introduced by HMRC from 1 April 2022. 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 applies.

In summary, the two triggers that require notification are:

1. a provision is recognised in the accounts in accordance with GAAP to reflect the probability that a different tax treatment will be applied to the transaction;
2. an interpretation or application of the law is not in accordance with how HMRC is known to interpret or apply the law. HMRC's interpretation of "known" means contained in HMRC published guidance, statements, other material or from dealings by, or in relation to, the taxpayer with HMRC.

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 world events such as conflicts, inflation or supply chain shortages which has led many organisations to re-assess their cross-border product flows and to manage labour shortages.

Tax and reputational risk

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, profits of 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.

The impact of poor tax 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 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 will typically lead to penalties and late payment interest being charged.

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:

• Do you have a process in place to identify changes in the tax regime or tax authority interpretation that are relevant to your organisation?
• What systems are used to manage your tax compliance obligations 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?
• 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?
• Is remote or international working increasing your organisation’s vulnerability to cyber-crime?
• New overseas activities can commonly lead to unexpected tax consequences. What processes are in place to consider the corporate tax, VAT, duty 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 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.