EY questions HMRC tax changes
EY believes the key to a robust tax system is striking the right balance between enabling and mandating
A report by the Big Four firm explores whether proposals outlined in HMRC’s consultation document on “Improving large business tax compliance” has led the UK far away from the robust but competitive system of tax administration envisaged in the corporate tax roadmap, published in 2010.
EY highlights how the proposals demonstrate the changing role of HMRC and explores whether these changes are necessary or beneficial.
Proposals outlined in the consultation document include the publication of tax strategies, the naming of a responsible board executive, a voluntary code of practice on taxation and the prospect of a “special measures” regime for high-risk businesses.
EY argues that the consultation will not only change the way businesses interact with HMRC and their stakeholders but could also change the way businesses operate as they are obliged to spend more time focusing on what they publish and less time working on commercial success.
The report highlights that the changes would impose a significant administrative and financial burden on many businesses and could also require businesses to disclose commercially sensitive information.
“In an environment where more and more businesses are voluntarily publishing and explaining their tax policies, and tax transparency is now firmly entrenched on business agendas, introducing mandatory measures could well be a backward step,” the report says.
More than three quarters (79%) of the FTSE 100 publish an element of their tax strategy. A further 37% of FTSE 350 companies are already following suit.
EY questions why HMRC is attempting to mandate an approach at a time when the behaviours it is seeking to influence are already evolving naturally.
“For HMRC to make mandatory requirements for public disclosure rather than allowing those to evolve to meet the needs of all stakeholders is, therefore, arguably a backward step,” said the report.
EY suggests that a more constructive approach could be to leverage the existing trust-based model to require that a documented tax strategy be made available to HMRC on a confidential basis. It argues there is no real need for a named executive director to be responsible for owning and signing off the tax strategy as the SAO regime already imposes high standards of governance and the obligations of the named SAO go beyond the signing of a certificate.
The Big Four firm also questioned the functionality of the proposed voluntary code of practice on taxation. Almost two thirds of those for whom the code of practice would be applicable, said they would not recommend signing it in its current form according to data gathered by the firm.
EY went on to question whether publication of a tax strategy in a prescribed form would be something that either HMRC or stakeholders actually need.
“While many of the elements of the example tax strategy proposed by HMRC are relatively uncontroversial and reflect the day-to-day practice of many businesses, the value of this information to the whole range of stakeholders is unclear,” it said..
It says that if HMRC is satisfied that an organisation is compliant and fulfilling all its tax reporting obligations, it should be able to decide for itself the extent to which they decide to make a more public disclosure based on the commercial realities of the business.
“We believe that making details available to HMRC on a confidential basis would be more effective than a published tax strategy document, the contents of which would be subject to restrictions on the basis of confidentiality and the need to be easily understood by a lay audience,” the report said.
The report also suggested allowing groups to tailor tax strategies to their own requirements, making them more meaningful and cost effective than one where they are required to make a specific set of disclosures that is dictated in advance.
The proposal for a special measures regime for high-risk businesses applies to the few organisations that enter into a significant number of tax avoidance schemes or for whom information notices are repeatedly issued before information is provided. With so few organisations expected to be impacted, EY argues whether it is appropriate to introduce such radical change to target so few.
The firm argues that the proposals impose an unwarranted burden on businesses and introduce an unreasonable level of complexity to the UK tax regime.
EY stressed that UK businesses will have to learn how to balance the new requirements in HMRC’s proposals with an already growing list of obligations, a task many businesses may find challenging.
It highlights that the proposals could result in a significant decrease in competitiveness of the UK’s tax administrative regime and could instead represent a very real deterrent for organisations considering the UK as an investment destination.
“There is still time to reflect on the issues raised here and halt the seemingly inevitable move towards coercive compliance. We are in favour of getting tax administration right and support the need to the tools to tackle those who break the law. However, targeting every large business is not the right way to approach things,” it added.
