Publishing Tax Strategies—Challenges and Opportunities for U.K. Companies

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Jane Mackay

Jane Mackay, Crowe Clark Whitehill LLP

Jane Mackay is a Tax Partner with Crowe Clark Whitehill LLP

Companies of a certain size are now obliged to publish their tax strategies in relation to their U.K. operations. Which businesses are affected and what are the requirements they must meet?

On September 15, 2016, the Finance Act of 2016 (“the Act”) received Royal Assent and became law, having successfully navigated the parliamentary process in both the House of Commons and the House of Lords. In the accompanying press release, issued by the government, the Act, it was noted, would introduce wide-ranging measures which would “provide opportunities for families,” “back British business” and “tackle multinational tax avoidance.”

For many organizations reviewing the fine print, the last point was perhaps the most significant. Within the legislation was the inclusion of a new requirement which obliges companies of a certain size to publish their tax strategies in relation to their U.K. operations. Along with a whole suite of other reporting obligations, the tax strategy must be published online and be freely available to those seeking the relevant information.

Who is Affected?

It is estimated that the operations of around 2,000 organizations will be subject to these new regulations. The Act requires that all U.K. groups, sub-groups, companies and partnerships with turnover in excess of 200 million pounds or a balance sheet of 2 billion pounds in the previous year must publish their strategies. This also applies to multinational organizations with a limited U.K. presence, provided their global turnover exceeds 750 million euros.

Publication Requirements

Within the published tax strategy, those affected organizations are required to produce a range of different information.

Firstly, the report must set out the approach of the group to risk management and governance arrangements in relation to U.K. taxation. Alongside this, information relating to the attitude of the group to tax planning and the level of risk in relation to U.K. taxation the group is prepared to accept, must also be included. The final obligatory requirement details the approach of the organization to its dealings with HM Revenue & Customs (“HMRC”).

While these are the statutory requirements, other areas of tax reporting should be considered. Indeed, it is good practice to look at the level of oversight the board has in relation to its tax affairs, the tax control systems it has in place and the motives behind its tax planning.

Potential Penalties

Given the complexity of the reporting standards, there is considerable time pressure for organizations to meet these requirements. The first tax strategy must be published before the end of the first financial year, following the September 15, 2016 sanction date. Following this, there is a subsequent annual requirement for republication within a window of nine to 15 months. Failure to comply with these regulations could result in an initial 7,500-pound fine, if it is not rectified within six months, with further penalties of 7,500 pounds following per month, until resolved. It is clear then that overlooking, or ignoring, the publication obligation could be costly.

Likely Outcomes

As with other similar pieces of legislation, where organizations are compelled to report on wider business issues, such as gender pay or their responses to modern slavery, some businesses may use the legislation as an opportunity to demonstrate compliance and their commitment to corporate social responsibility. If organizations are going above and beyond their tax requirements or compare favorably to their competitors, there may be a greater emphasis on promoting the reports that are published to their clients and stakeholders.

Considering the current direction of travel with regards to taxation legislation (for instance the introduction of the Diverted Profits Tax in 2016 and the OECD's recommendations around base erosion and profit shifting), some global organizations may use this to preempt any wider requirements and publish their global tax strategies, which could foster closer collaboration with international colleagues and negate any undue media attention.

On a similar note, companies based solely in the U.K., but which are not bound to publish their tax strategies, may begin to consider whether it is worthwhile doing so regardless. Indeed, having a published tax strategy to hand could ease dealings with HMRC's risk review process and indicate the business's proactive approach to tax.

There will also be a greater need for businesses to think about their tax strategies, not just on a compliance or planning level, but to embed it into the day-to-day business activity of the firm. Involving a wider group of departments to feed into the planning, from public relations and marketing to sales and customer relationship management, will become ever more important, as the operations of the organization will have to back up what is included within the report.

What Should Organizations Do?

Organizations that believe they do not need to publish a tax strategy may want to review their structure very carefully to ensure that there are no entities in their holding structures that could bring them within the new requirement to publish a tax strategy. Similarly, as mentioned above, smaller companies based solely in the U.K. which are not bound to publish their tax strategies may want to do so anyway, as having a published tax strategy to hand could ease dealings with HMRC's risk review process. Having a published strategy can signal to the public that the company is behaving as a good corporate citizen as regards tax, which can give a competitive advantage.

But however the legislation is likely to affect a business, both now and in the future, it is important for decision makers and those with overall responsibility for tax reporting to seek specialist tax advice to determine how the Finance Act affects their strategy and whether they fall under the requirement to publish.

Jane Mackay is a Tax Partner with Crowe Clark Whitehill LLP.She may be contacted at: jane.mackay@crowecw.co.uk

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