How are you getting on with yours?
Tax is now a legal and branding issue
Interest in the tax affairs of large businesses has increased dramatically, stoked by the perception that many are not paying their "fair share" even if they are paying the legally correct amount of tax. As a result, both business and the government have had to focus more on the subject: tax is now a potentially toxic issue that affects a business' brand and public reputation as much as its finances. Practically, this means that tax can't be the sole responsibility of tax and finance teams.
Arguably the most important part of the new landscape is the emphasis on transparency. Country by country reporting of revenue earned and tax paid has been introduced, and HMRC has the option to invoke a public "special measures" regime for persistent defaulting businesses. Tax is also on the radar of the Financial Reporting Council, which has suggested that all companies should enhance the quality of tax disclosures in their annual accounts.
There is also a new requirement for roughly the largest 2,000 businesses in the UK to publish their tax strategies. This requirement applies for financial years started on or after 15 September 2016 – the rules are in force now. Groups in scope should be actively engaged in writing their strategies, if they haven't done so already.
What do you have to do?
The tax strategy publication requirement applies to UK-headed groups (or UK sub-groups of international groups) with either a turnover of £200m+ or balance sheet assets of £2bn+. Businesses in scope will have to publish information on their:
- approach to UK tax risk management
- attitude to tax planning
- view of acceptable levels of business tax risk, and
- approach to dealings with HMRC
A strategy has to be published every financial year and renewed within 15 months of the last strategy being published. It has to be made freely available to the public on the internet, either as a stand-alone document or part of a larger publication.
How transparent should you be?
A majority of FTSE100 companies already publish at least some information on their approach to group taxation, with considerable variation in the quantity of information provided and how informative it is; the question remains, how far should companies go?
An instinctive reaction might be to reveal very little – to give the bare minimum of information to meet the new requirements and avoid commitments to anything but the lightest of obligations – saying little initially arguably reduces the chance of being caught out later on. This may well be the right approach for some businesses, for example those that take a relatively aggressive approach to tax planning (or might do so in the future).
For others, that approach might be to miss an opportunity. Tax has now become a high profile reputational issue, and what a business says about tax can say a lot about that business, its culture and its view of the role is plays in society. For those that want to be seen as a good corporate citizen and which genuinely take an open, non-aggressive approach to managing tax affairs, this new requirement provides an opportunity to say so publically.
How do you actually write your strategy?
Whatever the approach taken, the reporting requirement raises practical issues.
The content of a tax strategy cannot be determined retrospectively – businesses must decide on their strategy and conduct their affairs accordingly. Put another way, businesses will need to be proactive in running their tax affairs to reflect what they want to be able to put in their strategy at the end of the year.
Who should be involved in writing the strategy? Clearly, in-house tax teams have to be involved and the legal team will also have a significant part to play. There's also a good case to be made for the involvement of the marketing and PR teams as well as, critically, the commercial teams - in other words the people who will need to sign up to the content because they will be implementing it in practice.
Crucially, authors will need to consider how arrangements might sound to a layman, not a tax expert.
Ownership and implementation
For the strategy to work, someone will have to police it and be responsible for its implementation; who should that be? The answer will vary from company to company given variations in group structures and reporting lines. In-house tax and finance teams clearly have a big role, not least because of the technical content of some of the relevant decisions that will be needed, but the content and implementation of the strategy may well have wider reputational and brand implications that are not best managed within a tax team.
Arguably, overall responsibility should rest with the General Counsel, company secretary and/or a designated board member. Whoever is responsible, it goes without saying that they will need to be confident that they have the right internal controls in place to avoid breaches of the strategy they want to publish.
How do you deal with adverse publicity?
The final point to consider is how to react to an adverse tax story. Has this eventuality been thought through such that a considered response can be delivered quickly? Has access to the right legal and PR advice been put in place? Does the business have a crisis-management plan and communication strategy? As with so many issues, the more work done in advance, the easier it will be to react quickly and appropriately if something does go wrong.