by Sandy Bhogal and Kitty Swanson, Mayer Brown, London
The UK Finance Act 2016 received royal assent on 15 September, bringing into force new rules requiring entities which are, or are part of, a large business operating in the UK to publish a tax strategy on the internet for financial years beginning on or after that date.
The new rules, which were announced at the March 2016 Budget and are intended to improve large business tax compliance, apply to the following categories of taxpayers:
- UK companies and partnerships (including limited and limited liability partnerships) that had one or both of turnover exceeding £200m and balance sheet total exceeding £2bn at the end of the previous financial year (as well as with UK permanent establishments of foreign companies where those UK permanent establishments would satisfy at least one of the above tests if they were treated as UK companies).
- Multinational groups that are subject to country-by-country reporting requirements in the UK (or would be, if the head of the group were UK tax resident), irrespective of the size of the UK members of the group.
- Other groups that include at least two UK companies (or permanent establishments) where the aggregate turnover of the UK members of the group at the end of the previous financial year exceeded £200m and/or the aggregate balance sheet totals of the UK members of the group at the end of the previous financial year exceeded £2bn.
- Any UK sub-group of a foreign-parented group falling within the previous bullet.
Tax strategy contents
A tax strategy must cover all of the following:
- The approach of the company/partnership/group/sub-group to risk management and governance arrangements in relation to UK taxation.
- The attitude of the company/partnership/group/sub-group towards tax planning (so far as affecting UK taxation).
- The level of risk in relation to UK taxation that the company/partnership/group/sub-group is prepared to accept.
- The approach of the company/partnership/group/sub-group towards its dealings with HM Revenue & Customs.
The tax strategy must also include a statement that the publication is regarded as complying with the obligation to publish a tax strategy pursuant to the applicable provision of Schedule 19.
It may also include other information relating to taxation, whether UK or otherwise and on a group or per entity basis; this may, for example, include discussion of the way in which the business engages with professional advisers in relation to its tax affairs.
The definition of UK taxation for these purposes is extremely broad, covering direct and indirect taxes, sector-specific taxes such as petroleum revenue tax, property and other transaction taxes, customs and excise duties, tax deducted from employment income, and national insurance contributions; however, a tax strategy is not required to include any information about activities of a company/partnership/member of a group or sub-group that consist of the provision of tax advice or related professional services to other persons, i.e., it is only concerned with the relevant company’s/partnership’s/group’s/sub-group’s own tax affairs.
It is worth noting that the new rules include the possibility for the UK to require a group or sub-group tax strategy to include a country-by-country report if the UK Treasury makes regulations to this effect; this would significantly increase public disclosure of a group/sub-group’s tax affairs, as not all groups/sub-groups within scope of the tax strategy rules will otherwise be required to prepare a country by country report, and those that do will not be required to make it public in the absence of such regulations.
Given that a majority of jurisdictions implementing country-by-country reporting are not proposing to require public disclosure of the reports, this would result in a significant distinction between disclosure requirements in the UK and elsewhere if such regulations are introduced.
Executive approval
In a policy paper, HM Revenue & Customs has indicated that tax strategies should be approved by the executive board of the relevant business (the aim being to ensure that tax matters are considered at executive level).
Publication
The tax strategy prepared in accordance with the new rules must be published on the internet and made available to the public free of charge until such time as the next year’s tax strategy is published (or, if a tax strategy is not required the following year, for at least one year).
The first tax strategy is required to be published for the first financial year beginning on or after 15 September 2016, with subsequent tax strategies to be published within 15 months of publication of the previous one.
For groups and sub-groups, it is the head of the group or sub-group who is responsible for ensuring publication of a tax strategy, although it can be published by any UK company in the group or sub-group.
There is no requirement to publish evidence of compliance with the published tax strategy, although clearly HM Revenue & Customs will consider this in conducting risk reviews.
Penalties and sanctions
A fine of £7,500 is payable for failure to publish a tax strategy containing the required information or failure to keep it available for the required period; if this failure is not remedies within six months, a further £7,500 penalty will apply that month and every month thereafter until the breach is remedied. It is possible to appeal against a penalty, but insufficiency of funds and reliance on another person are generally not considered reasonable excuses.
In addition, sanctions may apply to UK companies/partnerships/groups/sub-groups that persistently engage in behaviour that is uncooperative (i.e., delays or hinders HM Revenue & Customs or involves being party to a tax avoidance scheme), contributes to unresolved tax issues where the disputed tax is at least £2m, and there is a reasonable likelihood of further uncooperative behaviour.
Sanctions may include restricted access to clearance procedures, removal of the right to rely on the defense of reasonable care, and “naming and shaming.”
Key concerns
Many large UK businesses already publish a global tax strategy. Although the new UK rules permit the UK tax strategy to be included in a wider document (i.e., it does not need to be a separate publication), the disclosure requirements of the new UK rules go beyond what is required in many other jurisdictions and impose a substantial administrative burden on businesses.
It has also been suggested that these new rules will not, in fact, be of substantive value to HM Revenue & Customs, as compulsory disclosure will make it more difficult to differentiate between those who make voluntary disclosure (which is generally considered indicative of a low-risk approach to tax) and those who do not.
There is a further risk that tax strategies will be generic in their content and drafted in vague language, which would hinder the desired effect HM Revenue & Customs intends this measure to have.
From the perspective of businesses, there is a concern that publication of a tax strategy could result in media scrutiny of routine tax decisions to the potential detriment of those businesses’ reputations if there is any perceived discrepancy between tax decisions and the content of a published tax strategy. This is likely to be a greater concern to businesses than the comparatively small penalties for non-compliance.
Finally, the new rules fail to take account of the fact that tax strategy is typically driven by commercial matters, i.e., tax strategy cannot be determined in isolation and without reference to the commercial and operational goals of the business.
Without this context, it may be difficult to evaluate a business’ tax strategy, which could decrease its value to HM Revenue & Customs and result in misinterpretation of the published strategy by the media or the general public.
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Kitty Swanson
Kitty Swanson is an associate in the tax practice at Mayer Brown. She advises on the tax aspects of a wide range of domestic and cross-border matters and transactions.
Email: [email protected] .
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