As large companies start to publish their UK tax strategies online, we set out the main characteristics of a good tax strategy.
You need to tell everyone what your approach to tax is. That was the message from the UK government to large businesses when it brought in a new rule to make these companies publicly publish their tax strategy.
The aim is to get the Boards of Directors to take a more responsible approach to their organisation’s tax behaviour by making them pay closer attention to how it manages its tax affairs. By understanding the tax consequences of business objectives, board members can see the potential risks to their financial position – as well as the potential for reputational damage by entering into what can seem to be aggressive tax planning.
This rule affects companies with large UK operations (with turnover more than £200 million or a balance sheet exceeding £2 billion) and UK companies that are part of a large multi-national group. They now have to publish their tax strategy on their website and update it annually. The strategy needs to include:
Painting the picture
How should firms start work on communicating their tax strategy? Take the four areas above, setting out the principles that apply to the organisation, then add some substance to these to give a general understanding of how these work in practice.
Application is important. Organisations need to think about how they can demonstrate what their strategy means and its practical application from the top down. For example, what metrics or behaviours are in place to measure how the strategy is being applied and to have confidence that it is being applied correctly across the organisation?
A good strategy avoids jargon and provides explanations in simple terms that everyone can follow. At the same time, it should not to use language that might hold the organisation hostage. All statements must be supportable if challenged by HMRC or the media; therefore management need to consider what questions their statements could generate and how they could respond to them.
Bear in mind this is a business conduct matter, not just about tax. The tax strategy needs to be consistent with the organisation’s values and code of conduct, showing no distinction between how it manages its tax affairs and the management of any other risk or the way it does business. The tax strategy also needs to conform and not conflict with what happens elsewhere in the group.
Note that HMRC is clear that boilerplate strategies will not do. Instead, it expects companies to focus on their specific operations and organisations.
NGOs are likely to pay close attention to the tax strategies of organisations which, in their view, have tried to avoid UK tax in the past. They will ask: how can you demonstrate that you are taking a responsible attitude towards tax now? What differs today from what you did in the past? This could make organisations disclose more about the lessons they have learned and the governance measures they have put in place.
Finally, consider the consequences of not publishing the tax strategy. Financial penalties apply. But just as important is the reputational risk – with the tax authorities, NGOs, the media and the general public. In today’s climate, observers are likely to take a dim view of any company exposed for not having made its tax strategy public, wondering what it has to hide. And who wants their organisation to be in the spotlight for this reason?
For further information please contact Janette Wilkinson.