Tax transparency and anti-avoidance in the UK

2016 has seen the introduction of a number of tax transparency and anti-avoidance measures in the UK several in direct response to the OECD’s final BEPS reports and the Panama Papers revelations. Groups, and in particular multinationals, should devote an increasing amount of time and resource to compliance and the provision of information to HMRC, the UK tax authority.

Key UK developments include the requirement for large businesses to publish a tax strategy and country-by-country (CbC) reporting. There will also be significant compliance demands in respect of a new corporate criminal offence of failure to prevent the criminal facilitation of tax evasion which potentially includes international businesses within its scope.

The overall aims of these proposals are two-fold, to focus the attention of the Board on tax matters and to use disclosure and transparency to change tax behaviour.

Large businesses: requirement to publish a tax strategy

The UK’s Finance Act 2016 has introduced a requirement for large companies, groups and partnerships to publish an annual tax strategy in respect of activities relevant to UK taxation. This tax strategy must be made publicly available on the internet. The first tax strategy must be published before the end of the first accounting period commencing after 15 September 2016.

Scope

The requirement to publish a tax strategy applies to UK companies, partnerships, groups or sub-groups with a turnover above £200 million or a balance sheet over £2 billion. For groups and sub-groups the combined totals of all UK companies are taken into account. UK branches which exceed the turnover or balance sheet thresholds will also be in scope.

The requirement also applies to “MNE groups” which are identified by reference to the OECD’s CbC reporting threshold of a global turnover of over €750 million. This means that a non-UK headed group may be required to publish irrespective of the size of the business in the UK. Open-ended investment companies and investment trusts are not required to publish.

Contents

The published tax strategy must cover:

1. The approach to risk management and governance arrangements in relation to UK tax. Guidance is clear that this should include details on management of tax risk including a high level description of key roles and responsibilities, information on the systems and controls in place to manage tax risk and details on the levels of oversight at board level.
2. The attitude towards tax planning affecting UK tax. This should set out situations in which external tax advice would be sought and outline of tax planning motives.
3. The level of risk in relation to UK tax that the business is prepared to accept, including prescriptive policies on acceptable levels of tax risk, if any.
4. The approach towards dealings with HMRC. This should include how the business works with HMRC on current, future and past tax risks, tax events and interpreting the law.

There is no requirement to publish supporting evidence that the strategy is being followed but HMRC can be expected to look at whether tax returns are consistent with the strategy. The published strategy must be expected to affect HMRC’s risk-assessment ratings and the ongoing relationship with HMRC. There is a clear aim to elevate consideration of tax strategy to the boardroom as it would be expected that the Board would take responsibility for both the strategy and ensuring it is followed.

Groups should consider carefully how to describe their strategy – whether being relatively brief or including a fuller narrative. Both have advantages and disadvantages.

Country-by-Country Reporting

The UK CbC reporting obligations apply to accounting periods beginning on or after 1 January 2016 and require UK parented multinationals with revenues above €750m in the previous period to submit a report (following the OECD template) in respect of the global group to HMRC within 12 months of the year end. Entities with a non-UK parent in a country which does not introduce CbC reporting or which does not have an effective exchange of information mechanism with the UK, will need to submit a report for the UK sub-group. In restricting this requirement to the UK sub-group members, the UK has taken a narrower approach than that taken in some other jurisdictions. In line with OECD recommendations, a multinational can opt to file in the UK on a group-wide ‘surrogate’ basis in order to access automatic exchange mechanisms and avoid the compliance burden of making numerous secondary filings.

A late amendment to the UK’s Finance Act 2016 enables the UK government to require groups to include a CbC report as part of its published tax strategy, preparing the way for public CbC reporting (as endorsed by the EU). This has not yet been implemented but may happen in due course.

Targeted measures to counteract tax avoidance

Corporate offence of failure to prevent the criminal facilitation of tax evasion

The Criminal Finances Bill currently going through the UK Parliament includes new offences of failing to prevent facilitation of UK and non-UK tax evasion. Fines are unlimited and the offences are “strict liability” meaning that they do not require proof of involvement of the “directing mind” (effectively senior management) of the entity. While financial services, legal and accounting sectors are expected to be most affected, all companies and partnerships are potentially within scope and both UK and international businesses are potentially subject to it. There is a statutory defence where at the time of the offence the relevant body had reasonable preventative procedures in place to prevent its associated persons from committing tax evasion facilitation offences. An “associated person” is a person who performs services for or on behalf of the relevant body. The concept is deliberately broad and draft guidance is clear that it can pick up agents and sub-contractors as well as employees. Due to the financial and reputational risk stemming from any suggestion that an offence has been committed, businesses are looking to see how they can put procedures in place to support a defence. This again affects UK and non-UK headquartered businesses; there is no exemption for “smaller” enterprises.

A full client briefing is available, please ask us for a copy.

Civil penalties for enablers of offshore tax evasion

The UK Finance Act 2016 has introduced penalties for those who knowingly enable (defined as encouraging, assisting or otherwise facilitating) offshore tax evasion. Penalties are up to 100 per cent of the amount of tax at stake. HMRC will be able to publish details of the enabler where certain thresholds are met.

Civil penalties for enablers of tax avoidance schemes

HMRC has also consulted on proposals to introduce penalties for “enablers” of “defeated” tax avoidance schemes. The proposals are broadly drawn and penalties of up to 100 per cent of the tax at stake are suggested. No timetable has been given for implementation.