New legal requirements for large companies to publish an annual tax strategy outlining their approach to tax planning, will raise potential reputational risk issues for business as well as adding to the overall costs of compliance, warns law firm Pinsent Masons
HMRC has published guidance which states large businesses will need to place details of their tax strategy online each year, with penalties for failing to include the necessary information or for late publication.
Heather Self, partner, Pinsent Masons, said: ‘This is going to impact a whole swathe of UK businesses and not just the multinationals where most of the political attention over corporation tax has been focused.
‘For example, this will force many of the new challenger banks and younger UK technology companies to start reporting on their tax strategy even if that company pays no corporation tax. It also applies to partnerships so we will see the bigger law and accountancy firms having to comply.
‘Large businesses are already burdened by enormous reporting and governance burdens so they are not going to welcome this extra requirement.’
Self said that while some businesses do provide shareholders and other stakeholders with information on their tax strategy, as a whole, they would prefer to keep this on a voluntary basis and are likely to be advised to be very cautious over what they publish in the public domain.
‘It is likely that legal and reputational risk involved means that these documents will have to be relatively bland. No business is going to want to have this document used as a stick to beat them.
‘The measure will be counter-productive if it deters businesses from publishing information which goes beyond what is legally required,’ Self said.
HMRC’s guidance makes clear the tax strategy must set out a company’s approach to UK taxation covering its risk management and governance arrangements, attitude to tax planning, level of risk and approach to dealing with HMRC. It applies for accounting periods beginning after the Finance Act is passed, so is set to apply from July this year.
This comes on top of separate Country-by-Country Reporting (CbCR)requirements which will see multinational groups having to provide tax authorities with a breakdown of their activities and the taxes paid in each jurisdiction where they operate, which forms part of the OECD’s Base Erosion and Profit Shifting (BEPS) action plan.
George Bull, senior tax partner at RSM, is warning that it is likely that some governments, including the UK, could heed calls for this information also to be made publicly available on the grounds that public interest in how multinationals pay their tax would trump the need for commercial confidentiality.
Bull said: ‘It is beginning to look as though an easy win for those concerned to restore the credentials of tax systems worldwide might be to make public the country-by-country reporting of multi-national groups. Three specific developments reinforce this view.’
The first is the EU proposal for public disclosure of certain information on a country-by-country (CbC) basis for multinational groups, which is expected to be published by the European Commission in April 2016.
Secondly, Bull cites the Business Tax Roadmap published by HMRC on Budget Day, which stated: ‘The government believes there is an opportunity to go beyond the outcomes of the BEPS project and enhance transparency over multinationals’ tax affairs by requiring them to make the details of tax paid publicly available on a country-by-country basis. The UK will therefore press the case for public country-by-country reporting on a multilateral basis.’
Finally, on 24 March the Australian Tax Office published the tax information of 321 Australian-owned resident private companies, under the corporate transparency legislation introduced in late 2015. The legislation enabling this publication has been briefly repealed following representations from investors that the disclosure endangered their security and privacy. The reintroduction of the legislation and the publication of the data followed the Australian Senate’s conclusion that the risks of disclosures to private investors were exaggerated.
Bull said: ‘All the signs are that CbC reporting will be made on the public record sooner rather than later.’