Why tax governance is under the microscope

HMRC is intensifying its focus on tax governance among large firms. A formalised approach to compliance is crucial, says Tania Dimitrovich.

A quick question for tax leaders: how high on your agenda is tax governance just now?

If your answer isn’t “right at the top” then it needs to be. Why? Because it’s firmly on HMRC’s. We expect a more intense spotlight to fall on tax governance over the next year, and you’ll need to be ready for it.

There are currently three principal areas of regulation that demand robust tax governance of larger organisations.

This obliges large companies to implement appropriate tax accounting arrangements. To that end, they must appoint an individual – the Senior Accounting Officer (SAO) – to be personally responsible for ensuring these are in place.

The SAO must make an annual declaration to HMRC to that effect. Should the firm’s arrangements fall short, the SAO can be held personally liable, and fined up to £5,000.

This requires organisations to avoid helping third parties to evade tax. As the name suggests, those that fail to do may be judged unlimited fines.

Complying with the Corporate Criminal Offence (CCO) legislation isn’t just a legal necessity. It’s important to a company’s capacity to win business and attract investors. The need to demonstrate the ‘reasonable procedures’ demanded by the CCO often features in RFPs. And these procedures form part of the due diligence checks carried out during a transaction.

Large firms are legally obliged to develop and document a tax strategy, and publish it online. The result being greater examination of companies’ tax arrangements from stakeholders and the wider public. Businesses are increasingly being held to account for paying their fair share of taxes.

None of these compliance requirements are new. But how adequately organisations meet them is coming under growing scrutiny. Not least because HMRC has signalled its intention to step up its Business Risk Review Plus (BRR+) assessmens – something we’re now seeing happening on the ground.

The BRR+ regime assesses tax risks in the UK’s largest 2,000 groups. At a review, HMRC looks at 24 indicators of the strength of a firm’s tax systems, processes, policies, controls and risk management. It uses these to evaluate overall levels of tax risk across three key areas:

1. Systems and delivery
2. Internal governance
3. Approach to tax compliance

At the end, a business is given one of four risk ratings: low, moderate, moderate-high or high, which will influence how HMRC deals with that group going forward.

It’s worth noting that that a BRR+ is more than a tick-box exercise: HMRC brings an element of qualitative judgement to its reviews and ratings.

So how can corporates ensure their tax governance is sufficiently robust and optimally resourced?

In my experience, there are two fundamental aspects to effective tax governance: clear responsibilities and formalised procedures.

Firstly, clarify the role of the tax team in your tax governance landscape. Their involvement will go beyond the taxes they deal with day-to-day, such as VAT and corporation tax. Should a BRR+ unearth problems with, say, customs or employment tax compliance, questions will be asked of the tax function.

Secondly, write everything down. Create a comprehensive risk register. Produce a tax manual, with written instructions for each return, the data required, how to obtain it, what to report and when, what to disclose publicly, and all of the relevant checks, controls and tests.

Formalising your tax governance in this way has a couple of important advantages. It embeds the audit trail that HMRC expects to see in the event of a BRR+. Too often, businesses leave this until they’re under review, which won’t impress the authorities.

Rigorous process documentation will also prevent key-person dependency. I’ve seen firms – especially fast-growing ones – come unstuck because their tax governance sits with one individual, who then leaves.

You can’t formalise tax governance without a firm understanding of what you have in place, and what’s missing. You’ll need to ask yourself a series of questions to build up that detailed picture:

• Is your tax strategy aligned with the wider business strategy?
• How do you manage your tax risks?
• How do you keep on top of changing tax rules and requirements – and how do you adapt your processes in response?
• How do you stay abreast of changes within the business, and identify their tax implications?
• How do you adapt your processes accordingly?
• What are the tax function’s KPIs – and are they the right ones?
• Do you have a tax risk register and/or control matrix? Are they up to date?
• What tests do you run to make sure your controls are still relevant and effective?
• Do you have a tax reporting pack?
• What checks do you run to ensure your tax numbers are correct?

Undergoing a BRR+ assessment can be difficult. Tax professionals won’t always know what to ask of the business, so as to gather the information that HMRC requires. You may need an external adviser to interpret what the 24 indicators mean in practice, and apply them to your tax governance operation.

KPMG’s tax governance experts can support you and your team. Many of us have worked for HMRC, so we know the compliance rules, the BRR+ regime and the authority’s latest thinking.

Please get in touch to see how we can help you implement robust tax governance, and manage the process of responding to a BRR+ assessment.