Complex and international companies will be under more scrutiny than ever before, say leading business and financial advisors Grant Thornton.
HMRC are due to implement a new approach to compliance risk management, which will be put into practice for the largest businesses by the end of this year. Under the new approach, companies assessed as high risk are highly likely to face intense scrutiny compared to those that are considered low risk, which will receive very limited enquiries for up to three years from an assessment.
Commenting on HMRC's new approach, Paul Roberts, Tax Risk Partner at Grant Thornton said: "The main advantage of holding a low risk rating involves minimal scrutiny from HMRC and obtaining a low risk rating is definitely reachable. The key is to maintain it. Remaining a 'low risk' business could be harder than businesses realise."
Main concerns usually include underestimated risk of liabilities so that the provisions in the accounts are understated. However, audit requirements for tax provisions are getting stricter, and having an over provision can also be a risk that needs to be managed.
The complicating factors that may contribute to the risk level of a company could include company change, business complexity, boundary and cross-border issues and tax contribution.
Heather Self, International Tax Partner at Grant Thornton, warned of complacency amongst international companies, and said: "For companies with a US listing, experience under the Sarbanes-Oxley Act has shown that tax issues can be a major cause of financial statement restatements."
By changing their approach, HMRC believe that resources focused on higher risk businesses will result in a larger collection of tax, leaving the compliant low risk businesses to earn more profits, which, in turn, also increases tax collection.
Key concerns of HMRC include taking a stronger line against 'tax avoidance schemes' to show they have not been implemented properly, questioning the morality of tax avoidance, keeping their eye on the selling of tax planning ideas by accounting firms to audit clients, and penalising those that fail to take 'reasonable care' when ensuring tax-sensitive items in financial records are correctly allocated.
When rating the risk of a business, HMRC look at the business attitude towards risk issues, the nature of the business's compliance relationship with HMRC, the company's tax strategy, its reporting structures and the resourcing of the tax function. In terms of delivery, HMRC look at completion of returns and declarations, monitoring of internal processes, and the levels of supervision.
In response to this new approach Paul Roberts suggests companies take steps to self assess their position against HMRC's criteria. If a business wishes to reduce its risk rating, the first step is to establish the Board's view on tax. "Numerous questions should be considered for self assessment, concerning the tax fit with the business strategy, the aggressiveness of the Board's appetite for tax risk, and more importantly its relationships with major tax authorities," he said
"Essentially, a Finance Director should understand the difference between HMRC's view of tax risk and the commercial exposures, as part of the company's wider risk picture," he said.
"Companies have always managed tax risk to some degree and may feel that the subject has been overhyped in the past. However, this is a real issue that needs to be addressed and if complacent, companies may be under more scrutiny than they bargained for," concluded Roberts.
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