Mid-sized businesses do not see tax compliance as priority

Mid-sized businesses do not see tax planning and compliance as a major priority for their businesses but more part of the everyday running of the business, with heavy reliance on accountants and tax agents to handle their tax affairs

According to HMRC research into the attitudes of UK mid-sized businesses with turnover in excess of £50m to tax, when businesses took a proactive stance on tax compliance, almost all their behaviours related to tax planning or clarifying internal protocols to ensure prompt and accurate payment of taxes due.

Tax was rarely mentioned as a priority for this size of company, overshadowed by much more pressing priorities such as mergers and acquisitions, regulatory compliance and company restructures. Many said their main objective was to grow the business and meet the needs of customers and stakeholders, and that tax was secondary to these priorities.

A few described this approach as ‘tax following the business’ rather than tax driving business decisions. Although it was rarely highlighted as a priority, tax did feature as a key consideration for some businesses when pursuing other priorities. These businesses said that they undertook tax planning to maximise tax efficiency where possible. For example, some businesses mentioned using tax reliefs on investments in research and development (R&D) and others used transfer pricing to balance their tax exposure across the jurisdictions they operated in.

One publicly listed company said that it did ‘have some transfer pricing agreements in place which we think are sensible and reflect how we run our business. We don’t structure our business for tax purposes at all, we structure it to maximise income and therefore profits for our external shareholders’.

Another said that the reason for using a ‘transfer pricing model wasn’t around tax minimisation, it was because we’d suddenly become of a size where we had to consider it. It was more about risk management and making sure that we could justify why we’ve got which profits in which company’.

Around half of the companies interviewed had a written tax strategy, which was developed at board level.

According to HMRC, mid-sized businesses account for 12% of the tax gap and so are a priority for the tax authority to clamp down on possible aggressive tax planning.

Use of accounting firms and tax advisers

Nearly all businesses interviewed used an accounting firm to handle their tax affairs. This was typically because they did not think they had the necessary tax expertise in-house, and used agents for ongoing consultancy, planning and strategy, and one-off queries. They also relied on firms for expert advice and to reduce their tax bill as far as possible, while others sought advice about tax compliance in overseas jurisdictions. Businesses said that it was ‘not appropriate to contact HMRC directly about these topics’.

The majority hired Big Four firms – PwC, Deloitte, EY and KPMG – while these were often supported by smaller, niche specialist firms. For those businesses that did not use Big Four firms, the main reason was price, stating that they felt the ‘cost of Big Four agents was too high’.

As companies grew they were also more likely to use a Big Four firm, with the research stating that companies ‘chose to move to a Big Four firm for a more comprehensive service or a more aggressive approach’.

The research showed that ‘it was common for businesses to have used the same agent for many years. In some cases, the relationship with the agent had commenced before the survey participant joined the company, so they did not have an insight into how or why the agent was chosen. Other businesses that were part of larger groups described a longstanding relationship between their ultimate parent company and an agent. In a few cases, the interviewee was keen to establish if a different agent might suit the business better – generally because they felt they were paying too much for their current agent’s services - but had so far not been granted permission by the parent company to go out to tender to investigate alternatives’.

HMRC as a source of information

The tax authority was rarely used as a source of advice and support, with only a minority of businesses stating that they would go direct to HMRC for advice, particularly on specific points of law, mainly because the advice would be free, but they ‘often felt it was difficult to contact the person in HMRC with the necessary expertise’.

While accounting firms were the first port of call for mid-sized businesses, those that did try to contact HMRC directly said they had ‘considerable difficulties getting through to a person in HMRC with the technical knowledge necessary to answer what was often quite a complex question; often they were “passed around” on the telephone a number of times and the person they eventually reached did not know the answer’.

Business tax position

When people prioritised tax efficiency this involved businesses actively seeking ways to minimise their tax bills. Inevitably, the core reason for this was to reduce overall costs and increase profitability.

In almost all cases, businesses’ tax positions were developed and agreed by members of the senior management team, with a long-term strategy on tax, typically setting out their tax position with little change over a three- to five-year period.

Those that did horizon scan for future tax risks, legislation or regulation changes approached this on a fairly informal basis. One company said that their process involved informal discussions about potential changes on a regular basis, but only formal modifications to procedures and practices in the event of guaranteed legislative or regulatory change. Another listed UK group said that ‘we don’t have a formal way of doing that, not for tax. I’m asked to contribute to internal documents on, for example, things like Brexit, potential change in government, all that sort of stuff. It’s just looking at what the future might look like’.

A privately owned company, which was part of a foreign owned group, said that it ‘identified our biggest risk [tax], documented it, and decided how to deal with it’, creating a detailed document to provide policy guidelines for staff.

In total, 40 one-to-one in-depth interviews were conducted by IFF Research between 24 April and 11 June 2018 with mid-sized businesses with turnover over £50m. Interviews were conducted with senior managers, including finance directors, financial controllers, finance managers, heads of tax and CFOs.

Report by Sara White

HMRC Mid-sized Business Tax Strategy HMRC Research Report 553

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