Tax Governance is a “hot topic”, but what does it actually mean? Is it a topic of only passing interest or is it of significant importance here to stay?
What is tax governance?
It is a mechanism whereby a taxpayer considers, and puts in place, controls and processes to a) correctly facilitate its decision-making process with regard to tax and b) ensuring tax obligations are correctly adhered to.
One could also consider tax governance as a short to long-term strategy a taxpayer adopts whereby it is proactive as opposed to reactive in matters relating to tax.
A proactive approach for tax is one where the taxpayer, at its own leisure, identifies and eliminates problems and glitches before they become bigger uncontrollable issues. It helps avoid tax problems, which if ignored, could prove to be catastrophic in terms of financial and reputational damage. This proactive approach could entail the taxpayer taking steps to ensure it is paying the correct amount of tax, at the correct time to the relevant authorities. This can be contrasted with a taxpayer who takes a reactive approach, whose management time becomes absorbed with managing tax authority enquiries and investigations, distracting them from the commercial issues facing their business.
Why should tax governance matter to me?
Firstly, a number of our clients consider tax governance solely because they want to do the right thing. They want to ensure they are conducting their affairs in the correct way and paying the correct amount of tax at the relevant time.
Secondly, and importantly, in light of the following non-exhaustive factors:
- Reputational risk - How would a taxpayer’s business revenue and its public and internal perception be affected if adverse tax governance performance became public? In the words of Benjamin Franklin, “It takes many good deeds to build a good reputation, and only one bad one to lose it.”
- Operational risk - Could the taxpayer and business operations be adversely affected if management time was distracted by dealing with tax difficulties? Also, could the taxpayer/its business continue to operate if it did not properly manage its tax affairs, bearing in mind, amongst other things, HMRC’s preferred creditor status for specific tax debts from December 2020? Does the taxpayer/business make use of tax benefits, which because of its potential negative compliance record, could be adversely affected if its tax governance deteriorated (e.g. construction industry scheme (CIS) status for payments between contractors in the construction industry and availability of economic operator registration identification (EORI) number facilitating cross border goods movements)?
- Opinion of stakeholders - will the taxpayer be about to work with certain partners and/or attract finance if it is not up to date with its tax affairs?
Also, tax governance matters because it is at the forefront of the minds of tax authorities. HMRC’s publication “Measuring tax gaps 2020 edition” revealed that the tax gap (“the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid”) stood at £31 billion. HMRC identifies that the tax gap exists due to a number of reasons: “some taxpayers make simple errors in calculating the tax that they owe, despite their best efforts, while others don’t take enough care when they submit their returns. Legal interpretation, evasion, avoidance and criminal attacks on the tax system also result in a tax gap.” The tax gap is broken down and attributed to the taxpayers as follows:
- £13.4 billion – small businesses
- £5.3 billion – large businesses
- £4.5 billion – criminals
- £3.7 billion – midsized businesses
- £2.5 billion – individuals
- £1.7 billion – wealthy
It is inevitable that HMRC is and will be focusing its efforts on addressing and reducing the identified tax gap, and it is highly probable that this will result in an increase in the number of HMRC enquiries and interventions. This is exemplified by HMRC’s increased introduction and usage of taskforces, whereby specific sectors and locations are targeted for scrutiny. In 2020 HMRC had in excess of 200 active task forces, which included the restaurants and takeaway sector, and the London Legal profession.
These enquiries and interventions could be into the affairs of taxpayers who are doing everything absolutely correctly, but time and effort will nonetheless have to be spent on relaying this to HMRC. Correspondingly, another reason to consider adopting tax governance principles is to be able to easily demonstrate adherence with the UK tax system in additional to regulatory and legal requirements.
By considering tax governance now, not only is a taxpayer getting off on the right footing in respect of its current obligations (paying the right amount of tax and avoiding penalties and interest charges), rather the taxpayer is also investing in its future, helping it get its tax obligations right and providing early warning systems to facilitate quick resolution of any difficulties. Effective tax governance can also help mitigate the length and complexity of future enquiries and interventions, as well as provide a safeguard against invasive enquiries and interventions from Revenue Authorities.
How can Mazars work with you with regard to tax governance?
Some tax governance compliance requirements are mandatory. For example, the following are obligatory for organisations who meet specific thresholds: the Senior Accounting Officer regime, publication of a Tax Strategy and Country by Country Reporting. Then there is the Corporate Criminal Offence, which applies to all incorporated entities and partnerships, irrespective of size and industry.
Tax Governance should not however be dictated by mandatory obligations. It is relevant not only to big businesses, but to all taxpayers.
We can, and have been, assisting our clients in undertaking bespoke health checks in addition to complying with the mandatory requirements within this arena, some of which are listed above. Our multidisciplinary team consists of lawyers, tax advisers, and ex-HMRC officers. Our team’s diverse backgrounds and expertise allows us to consider tax governance from a variety of perspectives, for taxpayers of all sizes operating across all sectors.
If you would like to speak to us about being proactive in terms of tax governance, please feel free to get in touch via the button below.
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