New Tax Compliance Requirements for Large Businesses

Large businesses are the target of a further package of measures in an attempt to close the UK tax gap through promoting low-risk behaviour and increasing tax transparency.

Key Points

• Many UK businesses must, for financial years commencing on or after Royal Assent of Finance Bill 2016, publish a publicly available and free online Tax Strategy on their websites,
• A Tax Strategy must address UK tax risk management, UK tax governance, UK tax planning, the business’s approach to risk taking in respect of UK tax and its relationship with HMRC.
• Non-compliance with the requirement to publish a Tax Strategy will attract penalties. Breaches of a published Tax Strategy may give rise to reputational issues and risk of action by shareholders.

These measures comprise the publication of an online UK tax strategy (Tax Strategy), sanctions for businesses who are "persistently" unco-operative with HMRC and a framework for co-operative compliance. HMRC considers that these measures will reduce aggressive tax planning and failure to engage with HMRC, and they are the latest in the chain of anti-avoidance measures being introduced. In this Part I we examine the UK Tax Strategy.

Key Definitions

"Foreign Group" means a Group whose head is a body corporate (excluding UK LLPs) incorporated outside the UK.

A "Group" means two or more bodies corporate (excluding LLPs), wherever incorporated, which together constitute:

• an MNE Group; or
• a Group other than an MNE Group.

 A "Group other than an MNE Group" means a Group consisting of two or more bodies corporate which contains at least two UK incorporated companies but which is not an MNE Group.

A Group is "headed" by whichever body corporate (excluding LLPs) within the Group is not a 51 per cent subsidiary of another member of the Group.

"MNE Group" is defined by reference to the OECD model legislation for the Country-By-Country reporting package as follows:

"MNE Group" means any Group that includes two or more enterprises the tax residence for which is in different jurisdictions, or includes an enterprise that is resident for tax purposes in one jurisdiction.

"Qualifying Company" means:

• a solus UK incorporated company with a turnover of more than £200m and/or a balance sheet total of more than £2bn; or
• a UK incorporated member of a Foreign Group which is a Qualifying Group and which is not a member of a UK Sub-Group.#

"Qualifying Group" means:

• if the Group is an MNE Group, a Group with a total consolidated group revenue of €750m or more (or the equivalent in any other currency in which the MNE Group’s Consolidated Financial Accounts are drawn up at the average exchange rate for the accounting period); and
• in the case of a Group other than an MNE Group, a Group with an aggregate turnover of UK incorporated group members of more than £200m and/or an aggregate balance sheet of UK incorporated group members of more than £2bn.

"Qualifying Partnership" means a UK Partnership with a turnover of more than £200m and/or a balance sheet total of more than £2bn.

"UK Group" means a Group whose head is a body corporate (excluding LLPs) incorporated in the UK.

"UK Partnership" means a body carrying on a trade, business or profession with a view to profit which is a general partnership, an English or Scottish limited partnership or a UK Limited Liability Partnership.

"UK Sub-Group" means two or more relevant bodies that would be a UK Group but for their membership of a Foreign Group.

Who must prepare and publish a tax strategy?

It is the responsibility of the head of a Qualifying UK Group, the head of a UK Sub-Group of a Qualifying Foreign Group, a Qualifying Company and a UK Qualifying Partnership to prepare and publish a Tax Strategy (see Key Definitions box). A group is either UK or Foreign depending on whether the head of that group is incorporated in the UK or elsewhere, respectively.

We discuss below, with examples, how the rules apply to different corporate structures.

1. Qualifying UK Groups

If a UK Group is a Qualifying Group, the head of the Group must ensure that the Tax Strategy relating to the UK Group’s approach to UK taxation is prepared and published. Any of the UK companies that are members of the group must publish the Tax Strategy. This will be relevant to all Qualifying Groups headed by a UK company.

2. Foreign Qualifying Groups

If a Foreign Group which is a Qualifying Group contains a UK Sub-Group, the head of the UK Sub-Group must ensure that the Tax Strategy relating to the UK Sub-Group’s approach to UK taxation is prepared and published. Any of the UK companies that are members of the UK Sub-Group must publish the Tax Strategy. This will apply to an MNE Group which is a Foreign Group that contains a UK holding company even if there are no other UK companies in the Group, and to all other groups of companies with two or more UK companies forming a sub group if they satisfy the turnover tests.

3. UK Companies and Partnerships (including LLPs)

If a company or partnership is a Qualifying Company or a Qualifying Partnership, that company or partnership must prepare and publish the Tax Strategy relating to its approach to UK taxation.
For clarity, a UK incorporated company within a UK Group or UK Sub-Group falls within the rules for qualifying UK groups or foreign qualifying UK groups above.

4. UK Permanent Establishments

A UK permanent establishment of a non-UK incorporated company is classified as a UK incorporated company for these purposes and is to be treated accordingly.

 Examples of when a tax strategy may be required

 

 

 

As can be seen, rather confusingly, the rules apply differently depending upon the entity concerned and the corporate group structure in place. This results in some anomalies, most notably that a group can qualify as a Qualifying Group (UK or Foreign) if it is an MNE and only has one UK incorporated company in its structure, but can only qualify as a non-MNE Qualifying Group if there are at least two UK incorporated companies. It is a shame that the rules were not simply drafted as a requirement to produce a Tax Strategy if the UK operations exceeded the relevant financial thresholds.

It should also be noted that UK incorporated companies are UK companies for this purpose irrespective of the location of their activities and the financial tests will be applied by reference to their activities worldwide. However, a foreign company with UK and foreign branches is only treated as a UK company for these purposes in respect of its UK branch, leaving the foreign activities out of the financial qualifications. There is no obvious rationale for this result.

The Tax Strategy must address:

• the approach of the business to risk management and governance arrangements in relation to UK taxation;
• the attitude of the business towards tax planning (in so far as it affects UK taxation);
• the level of risk the business is prepared to accept in relation to UK taxation; and
• the business’s approach to its dealings with HMRC.

The Tax Strategy must also make clear that its publication satisfies the business's duty to publish a Tax Strategy in accordance with the legislative framework. No supporting factual information is required to be published.

Content of the tax strategy

While many businesses already include some narrative in respect of their tax policies in their annual report or other publicly available documentation, we would anticipate that even those businesses which follow the Confederation of British Industry’s (CBI) seven tax principles or who are members of the Extractive Industries Transparency Initiative (EITI) will most probably need to include additional information to satisfy the requirements of the Tax Strategy. HMRC has helpfully published draft high-level guidance on the content of a Tax Strategy which can be found here: https://www.gov.uk/guidance/large-businesses-publish-your-tax-strategy. HMRC will assess a business against its Tax Strategy and we would therefore expect businesses to take a cautious approach to early Tax Strategies by not making them unduly onerous and consequently for these to be short and to the point. This approach may change over time as businesses are able to review other Tax Strategies and once HMRC’s practice of enforcing compliance with the strategy becomes clearer. Please see the box below for an overview of the contents of a Tax Strategy.

Outline contents of a tax strategy

Tax risk management and tax governance

• Who designs and has ownership of the Tax Strategy
• What policies, procedures and governance frameworks are in place in respect of tax risk and which support the Tax Strategy
• The role of the board, financial director, chief financial officer and/or audit committee in respect of the Tax Strategy
• The level of oversight of the Tax Strategy

Tax Planning

• Compliance with arm’s length and other OECD principles
• Approach to tax incentives and exemptions
• The drivers behind and approach to the structuring of tax planning
• Whether tax is paid where profits are earned

• Whether there are any artificial tax arrangements in place

• Whether any code of conduct is followed

Risk Taking

• Any risk rating allocated to the business by HMRC
• How prescriptive the board/financial director/chief financial officer/audit committee is in respect of what is an acceptable level of risk to take

Relationship with HMRC

• How transparent, open, and/or compliant the business’s relationship with HMRC is
• How proactive the business is in relation to tax disputes and how prompt the business is in disclosing matters to HMRC

• How the business works with HMRC to meet statutory requirements

Confirmation that the Tax Strategy is compliant with HMRC’s requirements

Putting together a tax strategy and board involvement

While any tax team should be well placed to put together a Tax Strategy, a business should consider obtaining board approval of the Tax Strategy as part of its governance function. Although HMRC has previously remarked that it believes that the board as a whole is responsible for a Tax Strategy as part of a business’s corporate governance process, there is no legislative requirement to obtain board approval.

HMRC’s use of the tax strategy

HMRC intends to use a business’s Tax Strategy to help it determine the level of risk it should allocate to that business. The Tax Strategy may therefore influence the level of scrutiny a business is under from HMRC. However, if businesses adopt similar Tax Strategies, this may not be very significant.

Timing of publication of tax strategy

Businesses should have until at least summer 2017 to publish their first Tax Strategy as a business’s first Tax Strategy need not be published until the end of the business’s first financial year starting on or after Royal Assent of the Finance Bill 2016 where the business has satisfied the financial tests in the previous financial year. Royal Assent of the Finance Bill 2016 is not expected before the end of summer 2016. Going forwards, if applicable, a business has 15 months from the date of publication of its previous Tax Strategy to publish its next Tax Strategy.

The Tax Strategy must remain published for at least one year or until the Tax Strategy for the following year is published, if earlier. A Tax Strategy is treated as published once it is available on the internet.

Penalties 

An appealable penalty of £7,500 may arise:

• if a business fails to publish a Tax Strategy containing the required information within the prescribed time or fails to ensure that the Tax Strategy is publicly available for the prescribed time;
• if a business still has not published a Tax Strategy containing the required information six months after it was due to be published; and
• for every month thereafter in which a Tax Strategy should have, but has not, been published.

HMRC must notify a business if it is to assess a penalty, and the business has 30 days from the receipt of notification of a penalty assessment to appeal that penalty in writing. There are no statutory penalties for a business failing to follow its Tax Strategy or for a Tax Strategy not reflecting the inner workings of a business. However, as mentioned above, HMRC will be using the Tax Strategy to evaluate risk, and therefore to deviate from a Tax Strategy could result in a business being subject to increased scrutiny from HMRC. There are also reputational issues which could arise and a risk of legal action from shareholders if a business’s Tax Strategy deviates materially from its actual internal workings and policies.

Notification of publication of tax strategy

While there is no legislative requirement to notify HMRC of publication of a Tax Strategy, as HMRC will be scrutinising whether a Tax Strategy is published and continues to be published within the statutory time frames, it may be prudent to notify HMRC once a Tax Strategy is published.

Changes to the original tax strategy proposal

The Government originally proposed that:

• a named individual should be accountable for a business’s Tax Strategy; and
• the Tax Strategy should include the target effective tax rate (ETR) of the business and the measures taken to reach this target.

These proposals were criticised during the consultation process and have been dropped. Multinational groups are unlikely to have an ETR relating to the UK business alone and this would have caused difficulty in practice.

Looking forward

While businesses have at least a year before their first Tax Strategy is required to be published, we recommend setting the governance wheels in motion sooner rather than later. Also, while HMRC guidance may be updated, the scope of the legislation is more or less determined and now would be an opportune time to start producing an initial draft of the Tax Strategy.