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Opportunity for radical improvement – let’s not miss it this time!

Opportunity for radical improvement – let’s not miss it this time!

Tax risk: an opportunity for radical improvement – let’s not miss it this time!

HM Revenue & Customs (HMRC) has just published a summary of responses to its consultation document (issued in September 2017) which asked for views on how the current approach to risk assessment for large businesses could be improved.

We welcome many of the suggestions but remain concerned that the opportunity to make improvements might be missed.

The published document sets out the following potential areas of improvement suggested by respondents (almost two thirds of whom were large businesses; the majority of others were professional bodies and professional services firms), together with the Government’s own thoughts on the issues raised. We have also included some very brief commentary of our own:

  • The current binary ‘low risk/non-low risk’ classification in the Business Risk Review (BRR) process is often too narrow to reflect the differences across the large business population. The Government accepts this view and is proposing to pilot a new version of the BRR later this year with a view to a wider roll-out in 2019/20. The new version will almost certainly include significantly more than two risk classifications (yet to be determined).

Trident comment: Any approach which allows for greater differentiation and accuracy is to be welcomed. However, we are concerned that there remains confusion in practice as to what is meant by ‘risk’ in this context. Many BRRs in our experience produce not much more than a list of specific technical enquiries or proposed audit reviews, based on historical data. This could be because HMRC’s approach is grounded in an historical (backward-looking) perspective, rather than a more current and forward-looking analysis. We believe that, to improve the BRR process, all sides should start with a common understanding of its objectives and concepts. The current review begins with an assumption that the original BRR is the right place to start: this may be a missed opportunity to get full value from existing risk management provisions.

  • The BRR process should take more account of the tax risk management work already required of large businesses, such as the Senior Accounting Officer (SAO) provisions and the publication of tax strategies (PTS). The Government accepts this view but has not yet explained how it proposes to do this.

Trident comment: We strongly agree with this. Our view is that, taken together, the SAO and PTS provisions provide the fundamental building blocks of tax risk management. If these building blocks were optimised by HMRC and large business, the areas for deeper focus (audits and enquiries) would emerge naturally and the potential for disagreement as to their scope would be minimised. We do not believe that HMRC has yet fully grasped the opportunity that SAO and PTS provide in this regard; neither do we believe enough large businesses have fully recognised and leveraged the opportunity they provide (e.g. to make investments in new technology, the skills and capabilities for the future, and the behavioural changes required at the individual, team and enterprise levels). Our view is that much more work is required in the SAO and PTS areas and, once that has been done, the BRR process can be improved in the appropriate context.

  • The BRR process as a whole should be more interactive and iterative, that prompts continuous dialogue on reducing risk. The Government accepts this view and suggests that the BRR should ‘provide customers and HMRC with a clear set of actions and timelines which need to be regularly updates (sic) and discussed between the parties’.

Trident comment: In principle we would agree that dialogue is helpful. However, we believe that the objective of all stakeholders should be to make the tax system work better for the common good; and this requires reducing complexity, increasing transparency and restoring trust. The ‘Making Tax Digital’ project and the inevitable trend towards increased automation and real time connectivity would not lead us to expect a significant increase in dialogue (perhaps the opposite?). If SAO and PTS were optimised in this environment we would expect a reduced need for continuous dialogue; rather, we would expect dialogue to be focused on material issues as they arise. We’re not clear why the Government chose to focus on having clear actions and timelines in this context (these are basic project management tools).

  • There should be clear advantages and disadvantages of being assessed in each risk category. The Government accepts this view but with the caveat that ‘it needs to create a consistent and level playing field for all HMRC’s customers’. The Government is explicit however that only those large businesses whose approach to risk aligns with best practice e.g. the OECD’s ‘Tax Control Framework’ (TCF), will be judged as low risk.

Trident comment: We strongly agree that established best practice approaches to risk management are important elements here; and we strongly agree that HMRC’s approach should be differentiated. If a differentiated approach is rational and evidence-based then it would not compromise the obligation on HMRC to act consistently and to support a level playing field. There are existing examples of differentiation in the tax system: for example, the trend in enforcement legislation over recent years has been increasingly to differentiate based on taxpayer behaviours (e.g. penalties for errors in documents; ‘naming and shaming’; ‘special measures’; assessing time limits). The key here in our view is that differentiation should be rational and evidence based. Again, we call on HMRC and large businesses to look again at how the approach to SAO and PTS can be optimised before improving the BRR process.

In conclusion, we would encourage HMRC and large businesses to make the most of this opportunity to improve the approach to risk management. Our concern that this should not be an opportunity missed is exacerbated by the failure so far, in our opinion, for the opportunities presented by SAO and PTS to be fully realised. We consider this to be a necessary pre-requisite.

Finally, we should acknowledge that we missed our own opportunity to make suggestions during the consultation period. HMRC’s proposal to undertake a pilot during 2018 has encouraged us to share some thoughts now; we would be pleased to discuss them further.

If you would like to discuss any of the issues raised in this article, or find out how we can help you manage tax risks in your business, contact us here.

The published document can be found here.