This article focuses on another tax governance obligation for large businesses in the UK; the requirement to publish their tax strategy. It is a follow-up to a previous article about Senior Accounting Officer (SAO) requirements.
As well as businesses that fall within the SAO regime, it is a legal requirement for all qualifying groups, companies, partnerships and permanent establishments to publish their UK tax strategy online.
Whilst the rules most obviously apply to large UK corporate groups, they also need to be considered in situations where there is a UK company which is part of a large overseas headquartered group too.
Although businesses may find public scrutiny of their tax strategy unnerving, one could also view this as an opportunity to demonstrate responsible tax behaviours and a commitment to manage tax risks. In economically tight times, taxation will attract significant public interest and the publication of the tax strategy may provide an opportunity to help shape corporate reputation.
Which businesses are affected?
The requirement applies to UK companies or partnerships where, in the preceding financial year, either the entity alone or its group exceeded one of the following:
- A turnover of £200 million; or
- A balance sheet total of £2 billion.
For groups and sub-groups, the aggregate results of the UK companies (including UK permanent establishment) are used to assess whether the thresholds are met.
UK companies or groups that do not meet the threshold in their own right, may still be required to publish their tax strategy if they are part of a group with global turnover in excess of €750m and are subject to country-by-country reporting requirements in the UK (or would be if their head of group were tax resident in the UK).
What are the deadlines for publishing tax strategy?
When the business first meets the conditions in the previous financial year, a tax strategy must be published before the end of the current financial year. For example, if the business first met the qualifying conditions in the year ended 31 March 2023, the first tax strategy would need to be published before 31 March 2024.
Once a strategy has been published there is also a requirement for it to be reviewed to ensure it remains up to date.
What are the penalties for non-compliance?
Financial penalties can be imposed if a business meets the requirements to publish a strategy and:
- Does not publish tax strategy; or
- Publishes a tax strategy that does not include all the relevant information; or
- Does not ensure that the published strategy remains freely available for the appropriate period.
Penalties for falling to publish a compliant strategy run from the first day after the date by which the strategy should have been published and the following may be charged:
- A penalty of £7,500 for not publishing a tax strategy;
- A second penalty of £7,500 if the tax strategy has not been published 6 months after it should have been;
- Further penalties of £7,500 for each subsequent month until the tax strategy is published.
Perhaps of equal, or even greater concern, is the fact that the organisation can expect to be subject to increased HMRC scrutiny as a failure to comply with the tax strategy requirements could suggest that there are other tax compliance or tax governance failings. The organisation could also expect its Business Risk Rating to be higher.
Where to publish the tax strategy
The Tax Strategy is a legal requirement and must be published on a website and be available free of charge. The document can be part of a section of a wider document, such as an annual report or in a separate document.
If the relevant UK business does not have a website, the tax strategy should still be available for free on the internet on the foreign parent company’s website or any other subsidiary website or another website, as agreed by the business’s Customer Compliance Manager.
What must be included in the tax strategy
The tax strategy must be approved by the board of directors and in line with the overall strategy and operation of the business. This is a high-level document.
The strategy should include the following information:
- How does the business manage UK tax risks – this includes information that demonstrates the business approach to risk management and governance. For example, this may include things like how the business identifies and reduces inherent tax risk due to the size, complexity and extent of change in business, the governance framework used to manage tax risk, high level descriptions of any key roles, responsibilities, systems and controls in place to manage tax risk.
- The attitude of the business towards UK tax planning – the strategy should outline business attitude towards tax planning and provide details relating to UK taxation. This may include information regarding the approach the business has towards tax planning, or structuring tax planning, an outline of what influences the business’s tax planning and how this affects the business’s tax strategy.
- The level of risk that the business is prepared to accept for UK taxation – the business will need to provide guidance on the level of risk the business is prepared to accept, provide details of the internal governance process of measuring this and to explain the influence that relevant stakeholders have.
- How the business works with HMRC – the business will need to explain how it deals with HMRC. This may include information as to how the business co-operates and works to be transparent with HMRC on current, future and past tax risks across all relevant taxes and duties, and how the business works with HMRC to meet statutory tax requirements.
- Any other relevant information relating to taxation such as tax compliance and reporting
Businesses do not need to include the amounts of taxes and duties paid or any information that might be commercially sensitive.
Businesses need to ensure that the statements they make in the tax strategy are reflected in actual business operations. They should have sufficient documented tax procedure and policies to support the statement. This can provide an opportunity to improve the tax processes and also demonstrate the interrelationship with the SAO and CCO regimes, both of which focus on tax governance.
HMRC may review the group’s corporation tax returns alongside the tax strategy to try and ascertain whether the strategy is being applied. HMRC may take inconsistencies into account when carrying out its regular risk reviews.
Action to take
Affected businesses should allow plenty of time for preparation of a tax strategy (or build in timely reviews of existing ones). The strategy document needs to not only satisfy compliance requirements but may require consideration of business operations as well as an assessment of what level of business information should be disclosed. This may require multiple areas of the business to contribute or sign-off on relevant statements in the tax strategy, which should be factored into timelines for publication.