HMRC aiming to improve tax compliance by large businesses

By Susan Cattell, Head of Taxation (England and Wales)

5 November 2015

Susan Cattell discusses recent proposals by HMRC to improve tax compliance across the UK’s large businesses and to tackle aggressive tax planning by a minority.

ICAS recently submitted its response to the HMRC consultation on Improving Large Business Tax Compliance.

The proposals affect the largest and most complex businesses in the UK, some 2,100 dealt with by HMRC’s Large Business Directorate.  The aim is to demonstrate that whilst the UK is open and competitive as a place to do business, in return the government expects large business to exhibit socially responsible tax behaviour.  There are three strands:

  • A legislative requirement for large businesses to publish their tax strategy which would include details of their approach to tax planning and compliance
  • A voluntary ‘Code of Practice on Taxation for Large Business’ setting out behaviours which HMRC expects from its large business customers
  • A narrowly targeted ‘special measures’ regime to tackle the small number of large businesses that persistently undertake aggressive tax planning or refuse to engage with HMRC in an open and collaborative manner

In compiling its response ICAS canvassed views from members specialising in tax and those in business with board and corporate governance experience.   The proposals do not only affect tax and HMRC’s relationship with companies; they also overlap into the realms of corporate governance and company law led by the Department of Business Innovation and Skills (BIS) and in some instances delegated to the Financial Reporting Council (FRC).

There are clear tensions between the legislative approach proposed by HMRC to the internal governance of companies’ tax affairs and the targeted, non-regulatory approach adopted by BIS and the FRC.  In particular a high level of compliance with the Corporate Governance Code has been achieved through the use of ‘comply or explain’.   ICAS would welcome a more co-ordinated approach from government on proposals which cut across different areas.

Tax strategy proposals

Many companies already publish a tax strategy which for multinational companies will often be part of their global strategy.  Many international companies have already adopted, or are considering adopting, the BIAC Statement of Tax Principles for International Business in these strategies.

ICAS expressed concerns that, in the context of multinational businesses, a requirement to produce a UK tax strategy would impose an additional compliance burden and make the UK a less attractive place to do business; a purely UK strategy would also be incomplete and potentially misleading for investors.  ICAS held a meeting with HMRC representatives to discuss particular issues arising from the proposals for multinational and foreign owned companies.

ICAS also does not support the proposed ownership of the strategy by one board member.  This would be inconsistent with the principles of collective responsibility and a unitary board enshrined in the Companies Act 2006.

Code of practice on taxation

ICAS supports HMRC’s aim to promote collaborative professional working with HMRC to build an open, transparent and trusted relationship with large companies.  However we believe that this must be a two way process rather than the one-sided approach of the consultation proposals.

ICAS would like to see commitments from HMRC to match those from large business in relation to providing information and answers promptly and resolving issues in real time.   Meaningful dialogue relies on both parties being available and committed to it.

The proposed Code uses the term ‘intentions of Parliament’ and the Tax Strategy proposal refers to the ‘spirit of the law’.  ICAS believes that use of these terms is problematic because they are open to widely differing interpretations.  The BIAC Statement of Tax Principles for International Business and the CBI’s Seven Tax Principles for UK Business.

include statements on tax planning which provide reasonable alternatives.  Some companies already use these, and ICAS believes that their approach should be adopted in implementing the consultation proposals.

Special measures regime

ICAS supports HMRC’s aim to tackle unacceptable behaviour by what we understand is ‘a handful’ of companies.   However ICAS is not convinced that these companies cannot be dealt with using HMRC’s existing powers:  HMRC’s successes in this area are outlined in the consultation document.

If HMRC is given the additional powers suggested in the consultation it is important that the majority of large businesses should have certainty that they will be unaffected.   ICAS has therefore suggested a number of improvements and clarifications to the entry thresholds for the special measures regime.  This includes a suggestion that before any company is considered for inclusion in ‘special measures’ it should first have been placed in the existing High Risk Corporates programme for at least two years; only if this proves ineffective should it be considered for the new regime.

Next steps

The consultation closed on 14 October.  ICAS understands that HMRC has been working with the Office of the Parliamentary Counsel on draft legislation since early September.  The responses summary document and recommendations will be put to ministers for final decisions, and the outcome is awaited with interest.

Topics

  • Tax

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