Capital Quarter Summer 2020: Changes to HMRC reporting regulations

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The government has introduced a number of measures over the past few years to improve compliance and behaviour by UK businesses in relation to taxation. Chris Riley looks at three such initiatives.

Finance teams have had to get used to more onerous compliance and reporting requirements across all of their activities in recent years – and tax is no exception. Although the legislation typically focuses on larger businesses, the principles behind the regulations are increasingly applied to smaller entities by HMRC (particularly when enquiries identify errors), and considered by investors when assessing the risks and ethical stance of potential targets.

Of all the changes, three stand out as needing to be on the radar of finance teams of listed businesses. Failure to comply can result in significant penalties for both the company, and also responsible individuals (usually the FD). Each measure covers all UK taxes, including Corporation Tax, VAT and employment taxes.

The Senior Accounting Officer Regulations

Companies or groups with over £200 million of UK income, or UK assets over £2 billion.

The Regulations require qualifying UK groups to nominate a Senior Accounting Officer (SAO) who is required to annually certify to HMRC that they have sufficient accounting systems in place to calculate their tax liabilities accurately (or qualify their certification with details of any shortcomings).

Where errors occur, HMRC will enquire of all businesses what systems and processes are in place to prevent such errors occurring. Documented and tested systems and processes will help respond to such enquiries, and reduce the risk of significant penalties.

In many cases, whether the companies fall within the SAO regime or not, finance teams have adopted a regular internal audit process of all their tax systems. This gives comfort that they operate effectively to mitigate tax risk, and have documented the procedures that are followed.

Publication of Tax Strategy

Companies within the SAO regime above, and smaller UK subsidiaries of large multinational groups

Companies are now required to publish on their website details of their attitude to tax risk and strategy adopted in respect of taxation matters, and direct HMRC to this disclosure.

Tax strategy publications were first seen when companies found themselves in the media spotlight for not paying their ‘fair share’. The government has now mandated this principle for larger groups. Clearly, a company that discloses an aggressive attitude to tax planning is likely to receive more HMRC attention than one that does not.

Although only larger businesses are in scope of this legislation, many smaller companies (and their investors) have considered the tax strategy to be part of the Corporate and Social Responsibility policy of their organisation. Voluntary disclosure of the tax strategy, either as a standalone publication or by inclusion in the financial statements, is likely to increase significantly in the coming years.

The Corporate Criminal Offence

All companies operating in the UK

The Corporate Criminal Offence requires all companies to take reasonable steps to ensure that they do not facilitate, deliberately or inadvertently, UK tax evasion. This includes tax evasion by another party, and also extends to tax evasion risks in other jurisdictions where there is a UK connection.

For companies that are already within the scope of Anti Money Laundering regulations, the effect of the new legislation is likely to have limited impact on their business, as they apply the same principles of understanding the purpose and nature of transactions, identifying unusual transactions and carrying out Customer and Supplier Due Diligence (albeit with a specific focus on taxation). However, for many companies, this will be a completely new requirement.

Even companies with the most robust procedures may still unwittingly find themselves connected in some way with tax evasion carried out by a third party. However, penalties (which are unlimited in potential value) will not arise if the company can demonstrate that it had reasonable internal protections in place.

Why does this matter?

The new regulations require large companies to do more than just prepare a tax return – they also need to demonstrate that their calculations are supportable, and that their policies and procedures reduce their exposure to tax risk.

Listed companies of all sizes are likely to come under increased demand from HMRC, overseas tax authorities and activist investors to demonstrate that they are doing everything they can to manage these risks to an acceptable level. It makes sense to prepare for this now.