FRC to encourage 'tax transparency' in listed companies' annual reports

The Financial Reporting Council (FRC) has announced a 'thematic review' of companies' tax reporting, to ensure that it is done as transparently as possible and in a way that helps readers understand how the relationship between profits and tax paid could change in the future. It will write to a number of companies listed on the FTSE350 stock exchange before their respective year ends, informing them of its intention to review this aspect of their next published reports.

"There is considerable public interest currently in international tax arrangements, prompted by developments both in the UK and on a global basis," said Geoffrey Green, chair of the FRC's Financial Reporting Review Panel and a member of its conduct committee. "Investors have a heightened interest in wanting to understand the policy decisions made by companies and the impact these have on their current and future accounts."

"The FRC aims to stimulate boards to review their tax disclosures to ensure their annual reports provide high quality information for investors. Companies which are clear about their tax risks will be looked to as examples of good practice while in other cases, there will be an identification of where improvements may be made. Consistent with its overall objective, the FRC will consider how to publicly share the best of what is seen to help others raise the quality bar on this aspect of their reporting," he said.

UK corporate reporting rules and the International Accounting Standards (IAS) require companies to disclose the main risks and uncertainties that they face, as well as the actions they propose to take to mitigate the impact of those risks, as part of their annual reports. The IAS include some possible disclosures in relation to tax risks that companies can use to help those reading their reports understand whether the relationship between tax paid and accounting profit is unusual, and to better understand why that might be.

As part of its review, the FRC will consider firms' published disclosures in their entirety, including those included in their strategic and other narrative reports as well as the detailed accounting disclosures. It intends to particularly focus on the transparency of those disclosures and how effectively firms communicate their long-term effective tax rate; along with how well they communicate uncertainties relating to assets and tax liabilities where the value at risk in the short-term is not identified, according to its announcement.

The FRC indicated that "the current interest in certain international tax treaties", including national and international legislative changes and a crackdown by the European Commission into potentially anti-competitive tax arrangements entered into by countries including Luxembourg and Ireland with individual companies, was behind its intended review.

"The FRC writing to ask a company about its assessment of tax risks carries a much more powerful message than tax campaigners and NGOs doing the same," said tax expert Heather Self of Pinsent Masons, the law firm behind Out-Law.com. "Companies will need to take these letters seriously."

The announcement came ahead of the expected publication by the UK government of more details of its planned tax transparency rules for large businesses. It consulted in July on a new legal requirement for those businesses to publish their tax strategy, and to nominate a main board director to be held legally responsible for doing so; as well as the possible introduction of a voluntary code of practice on taxation and a regime for imposing 'special measures' on large businesses with a track record of persistent aggressive tax avoidance or of failing to cooperate with HM Revenue and Customs.