Tax transparency has moved up the agenda and is becoming more of a boardroom issue. In recent news headlines the area of tax is attracting attention globally.

Legislation passed in the UK in March 2016 introduced ‘Country-by-Country Reporting Regulations’ which will require multinational groups to provide information to help tax authorities better assess international tax avoidance risks connected with base erosion or profit shifting activity, better known as BEPS. This information will automatically be shared with other relevant tax jurisdictions in accordance with international agreements governing the exchange of information as set up by the OECD. The first reporting period commenced on 1 January 2016.

In addition, companies are starting to publish their tax payments and contributions in their annual accounts due to increased public and media scrutiny.

Adding to the challenges facing companies, the UK government is introducing legislation on tax transparency for large businesses. From 2017, large companies will be required to publish their tax strategies online free of charge to the public.

These new rules apply to approximately 2,000 businesses. Affected businesses will need to take care to ensure that their strategy is appropriately aligned with their operational practice in order to satisfy the increasing demands of stakeholders such as regulators, the public and financial markets. This article will outline who this new legislation will affect, the requirements for these companies and the implications of failure to comply.

Who does it affect?

This legislation will apply to:

• UK registered companies, partnerships and permanent establishments of non UK companies with turnover of £200 million or more, or gross assets of £2 billion or more; or
• Multinational business with any operations (regardless of size) carried out through UK companies or permanent establishments which have consolidated turnover of €750 million or more.

The legislation will affect stand-alone companies registered under the Companies Act 2006, partnerships and groups.

The scope requirements can be complex, particularly for foreign owned businesses, and there remains some inconsistency with the current published HMRC guidance. Care should be taken to understand the scope extension to UK partnerships and branches. It is the responsibility of a business to determine whether the legislation applies.

What are the information requirements?

Where the above thresholds are met, the minimum information which must be made publically available by the entity/group in respect of UK tax is:

• The approach to risk management and governance arrangements. The likely content here is:
  • How the business identifies and mitigates inherent tax risk
  • Governance framework used to manage tax risk
  • Levels of oversight and involvement of the Board
  • High level description of any key roles and responsibilities/systems and controls in place to manage risk.
• The attitude towards UK tax planning. The likely content here is:
  • Details of any code of conduct regarding tax planning
  • Outline of drivers of tax planning and the weighting given to these in formulating tax strategy
  • The group’s approach to structured tax planning
  • Explanation of when and why tax planning advice may be sough externally.
• The level of risk that a company is prepared to accept. The likely content here is:
  • An outline of when and in what areas internal governance is prescriptive on levels of acceptable risk.
  • How a company’s attitude to risk is affected or influenced by stakeholders?
• The company’s approach towards its dealings with the UK tax authorities. The likely content here is:
  • Explanation of how the company or group works in partnership with HMRC to meet statutory and legislative tax requirements
  • How the company or group is transparent or works with HMRC on current, future or retrospective tax risks, events or interpretation of law across all relevant taxes and duties.

When will the strategy be required?

Based on the legislation it seems clear that the rules will apply to financial years commencing on or after the date of Royal Assent of the Finance Bill 2016. However, some uncertainty has been introduced by the HMRC guidance published in April 2016.

As Royal Assent is expected later this year, for calendar year-ends this would mean publication of the UK tax strategy before the end of December 2017. However, if businesses want to be ready by the first day of the first financial year which is in scope, it will mean approval and adoption of the strategy by 31 December 2016.

The legal requirement is for the company to prepare and sign off the tax strategy. HMRC’s view is that Board level approval is likely to be required to satisfy this sign-off requirement. This should be considered by each company and group.

The legislation requires that the tax strategy “must be published on the internet” and available to the public free of charge for a year. The strategy must be published before the end of the current financial year, and if they were a qualifying company in the previous financial year, must not be published more than 15 months after the day on which its previous tax strategy was published. The strategy will be deemed “published” when it is first uploaded on the internet.

Although there is no requirement in the legislation to notify HMRC, in order for a Customer Relationship Manager (CRM) to assess whether the main duty has been met within the specified time period, it may be advisable for a company to notify them of the date and location of publication, rather than await a request from HMRC.

The top member of a UK group must ensure that the strategy is published, but any company within the UK group can publish its own strategy. If there are any ‘stand-alone’ UK subsidiaries of a foreign group, they may be treated as separate sub-groups i.e. that company would need to publish its own tax strategy. Whether this needs to be on a separate company specific website is not clear, but could present certain practical difficulties. The strategy must remain on the internet until replaced with the following year’s version.

Penalties for failure to comply with the legislation

Penalties may be assessed on the entity/group if it:

• Fails to publish a tax strategy within the prescribed period that meets the legislative requirements
• Fails to ensure that the tax strategy remains accessible on the internet for the prescribed period.

Penalties for groups and sub-groups will be assessed on the head of the group or sub-group. The following penalties for non-compliance will be levied on the business (rather than any individual within the organisation):

• £7,500 where the strategy is either not published before the end of the financial year or not publicly available for at least a year from publication
• A further £7,500 penalty applies if the strategy remains unpublished six months after the end of the financial year
• A further £7,500 per month thereafter until the strategy is published.

A penalty will be issued by the CRM. If HMRC cannot find the business tax strategy the entity/group may be at danger of a penalty. There is however an appeals process, where the entity/group can appeal a penalty within 30 days of the date of the notice of penalty. Companies may consider notifying the CRM to prevent any doubt that the strategy has been published.

A business will not be liable to a penalty if it has a reasonable excuse for the failure to issue a tax strategy and if it remedies that failure without unreasonable delay after the excuse ends. There is no definitive list of reasonable excuses and each will have to be assessed on the particular set of circumstances.

In addition to the above penalties being in force, the entity/group cannot discount the reputational risk that could damage a business for not complying with the legislation. This reputational risk could have a greater financial impact on the entity/group than any fine imposed by HMRC.

Accounts tax disclosures

In recognition of the public’s concern and interest in these areas, some companies have already taken the opportunity to manage reputational risk by way of detailed tax disclosures in the statutory accounts. Local business have also chosen to increase the disclosure of their tax contributions to ensure that interested parties have an informed understanding of the range of taxes, duties and charges paid by the business.

Conclusion

Large businesses are already loaded by vast reporting and governance burdens. This new legal requirement will not be overly welcome as companies will prefer not to have publically available tax policy disclosures which could provide ammunition against their business.

Work is likely to be needed to put in place the internal governance and risk management mechanics to enable the Board to feel comfortable that they have the right level of oversight and control. Groups will want to also consider their broader tax reporting and communication strategy to ensure GAAP compliance and their other stakeholder interests are properly managed.

Communication around tax is increasingly becoming more crucial and important in an environment where regulators, the public and financial markets expect ever greater levels of disclosure. The requirement to publish the UK tax strategy on a public platform is another step by the UK Government seeking to achieve tax transparency.

Peter Davis is a Chartered Accountant and a member of the Chartered institute of Taxation. He is a Tax Manager in Deloitte, Belfast.

Email: petedavis@deloitte.ie