The proposal to introduce a legislative requirement for the UK's largest businesses to publish their tax strategy is part of a package of proposals announced by the government in a consultation document. The proposals also include the introduction of a voluntary code of practice on taxation for large businesses and a regime for imposing 'special measures' on large businesses with a track record for persistent aggressive tax avoidance or failing to cooperate with HM Revenue & Customs (HMRC).
The package of measures is intended to apply only to businesses administered by HMRC’s Large Business Directorate with a turnover of more than £200 million and/or a relevant balance sheet total of more than £2 billion for the preceding financial year.
A named individual at executive board level would be responsible for owning and signing off the tax strategy. The proposals suggest that the individual concerned could be personally liable to a penalty if a strategy in the required form was not published. The requirement for a named individual is similar to the existing Senior Accounting Officer (SAO) regime, but it is intended that the tax strategy requirement would be kept separate from that regime.
Under the SAO regime certain large companies must appoint an individual to be their SAO and be responsible for ensuring that the company establishes and maintains appropriate tax accounting arrangements to allow tax liabilities to be calculated accurately. The SAO must give HMRC a certificate each financial year stating whether the company has appropriate tax accounting arrangements.
HMRC said that "Research shows that, with corporate tax contributions regularly in the spotlight, influence over a business’s tax behaviours is increasingly shifting away from the tax department and/or head of tax, towards the Chief Executive (CEO) and Board." It said "increased scrutiny of tax strategy by a business’s Board actively discourages aggressive tax planning".
Tax expert Jason Collins of Pinsent Masons, the law firm behind Out-law.com, said: “Forcing businesses to publicise their tax strategy will add to the compliance burdens for low risk businesses while probably not changing the behaviour of those at the top of the risk spectrum.”
The document states that if a business fails to publish the required information, a sanction will apply and this "could be modelled along the lines of the current HMRC SAO regime".
Under the SAO regime, the SAO is liable personally to a fixed penalty of £5000 if they fail to fulfil their duties. Jason Collins said “directors will be concerned that this new regime is adding to their personal liabilities.”
The tax strategy would be published annually by reference to the period covered by the business’s annual report or accounts. For multinational groups, the tax strategy would relate to the activities of the group that "relate to or affect UK taxation".
It is proposed that the tax strategy should include an overview of internal governance and should set out the company’s approach to risk management, their attitude to their relationship with HMRC, their attitude to tax planning and "appetite for risk in tax planning" – setting out whether the company seeks to "work in accordance with the spirit – in addition to the letter of the law". The strategy would also need to set out whether the UK group has a target 'effective tax rate' (ETR), what this is, and what measures the business is taking to maintain or reach this target ETR.
Research by PWC published earlier this year showed that in 2014, half of all companies in the FTSE 100 disclosed information about the governance of their tax affairs, compared with 37 in 2013.
The consultative document says that the requirement to publicly communicate a tax strategy would be "separate to, and distinct from" the OECD’s country-by-country reporting model. Once country-by country reporting comes into force, multinationals will have to provide to tax authorities a breakdown of their activities and the tax paid in the jurisdictions where they operate. However, the information will only be provided to tax authorities and will not be publicly available. Legislation introduced by Finance Act 2015 enables regulations to be made to implement country-by country reporting in the UK. It is expected that it will come into force in 2016.
The consultation document states that "in line with the agreed OECD approach to country-by country reporting" the proposal for the publication of a company's strategy will not require publication of the taxes paid.
In a further measure, HMRC intends to introduce a voluntary code of practice on taxation for large business. The government intends this to be a "common set of principles to encourage all businesses to adopt the most positive tax compliance behaviours, and which businesses themselves can use to promote exemplary behaviours across their organisation.
The government asks those responding to the consultation whether the tax strategy should require businesses to say whether or not they have signed up to the code of conduct.
Jason Collins said: "The code of conduct is going to be voluntary – but it is not very voluntary if the strategy has to say whether you have signed it or not".