HMRC publish draft guidance on large business tax strategy requirement

Fri 01 Apr 2016

Clause 149 and Schedule 19 to the draft Finance Bill 2016 cover the requirement for large business to publish their tax strategies annually, and these update the previously issued draft legislation in December 2015. In addition, HMRC has now issued draft guidance on these new provisions. This new requirement will apply to financial years beginning on or after Royal Assent. (Note: Schedule 19 also includes sanctions for persistently uncooperative large businesses, which are not covered by this article.)

Businesses affected

It is important to understand that these new requirements do not simply affect ‘large’ UK headed groups, but also UK sub-groups or UK companies, which are part of larger multinational groups, along with partnerships and even UK permanent establishments.   Specifically, Schedule 19 refers to “relevant” bodies and defines the following businesses as ‘qualifying’ for this purpose:

• Qualifying groups – UK groups with either group turnover of at least £200m or a balance sheet total of more than £2 billion (by reference to the aggregate figures for the group members for the previous financial year).  Note that UK permanent establishments are included as group members for this purpose;
• UK sub-groups of multinational enterprises (MNEs) meeting the above size criteria are also ‘qualifying’ businesses;
• Qualifying MNE groups which either meet the requirement for country by country reporting under s122 FA 2015, or would do if the head of the group was UK resident (meaning that small UK companies which are part of larger MNEs caught by CbC reporting are within scope). The CbC reporting requirement applies to groups with turnover of more than EUR 750 million;
• Qualifying companies – UK companies which were not members of UK groups or sub-groups at the end of the previous financial year and which have either turnover of at least £200m or a balance sheet total of more than £2 billion;
• UK permanent establishments of foreign entities are also treated as qualifying companies (and, as noted above, as members of UK groups of sub-groups as appropriate);
• Qualifying partnerships (partnerships under the Partnership At 1890, limited liability partnerships and limited partnerships) which satisfy the size criteria on the last day of the previous financial year.

Tax strategy document

Where a large business falls within the requirement to publish a tax strategy, it must set out the business’:

• approach to risk management and governance arrangements in relation to UK taxation, such as:
• How the business identifies and mitigates inherent tax risk because of the size, complexity and extent of change in the business
• The governance framework the business uses to manage tax risk
• The levels of oversight and involvement of the Board
• High level description of any key roles and responsibilities/ systems and controls in place to manage tax risk.   
• attitude towards tax planning (so far as affecting UK taxation), such as:
• Details of any code of conduct regarding tax planning  
• An outline of the drivers of tax planning and the weighting given to these in formulating tax strategy  
• The group’s approach to structuring tax planning 
• An explanation of why tax planning advice may be sought externally.  
• level of risk in relation to UK taxation that it is prepared to accept, such as an explanation of whether internal governance is prescriptive on levels of acceptable risk. (If so, is this quantified and how is this affected or influenced by stakeholders?)
• approach towards its dealings with HMRC (such as how it works with HMRC to meet it statutory requirements, and level of transparency with HMRC in respect of tax matters).

The tax strategy may be on an entity by entity basis for those entities located in the UK, or on a UK group-wide basis.   Additional information can be included if the business so chooses.

The following information does not need to be included:

• Any commercially sensitive information;
• Details of the amounts of taxes paid;
• Effective tax rate;
• Information about non-UK taxes, unless the business wishes to give further information in support of their general approach for reputational purposes. 

Publication of tax strategy document

The tax strategy document must be published online, although a business is free to also publish it in other formats as well. It must be free of charge and publically available for at least a year – until the following year’s strategy then replaces it.  The first time the tax strategy document is published is the start of the business’ financial year following Royal Assent.  However, going forwards, successive documents will have to be published with a period of between 9 – 15 months after the publication of the previous strategy document (timing of publication being defined as the time the document is published on the internet).  However, if the strategy has not changed, its contents do not need changing, but it must nevertheless indicate that the business confirms that the wording is still appropriate.  It is also sensible for affected businesses to make sure that they notify their CRM at HMRC when the strategy is published, and where to find it.

Penalties apply for the failure to comply, including where the tax strategy is materially incomplete as opposed to wholly absent, and also where the strategy is not publically accessible over the requisite period.  However, a warning notice will first be issued by HMRC before penalties kick in. Afterwards, the penalty starts at a maximum of £7,500, but further penalties of up to £7,500 may be charged for continuing failures.

Conclusion

The requirement to publish a tax strategy is a response to well publicised perceived ‘misdemeanours’ of large businesses.  HMRC will clearly scrutinise these documents extremely carefully, so the choice of language will be extremely important.  It will therefore be necessary for businesses to start thinking about their tax strategy documents well in advance so they can be scrutinised internally with as much zeal as HMRC is sure to apply in assessing the perceived risk level of the business.