An FD’s guide to tax strategy

The government’s plan to bring an element of transparency to businesses and their tax affairs comes into full effect in 2017.
Large businesses are now required to publish their tax strategy online, and many commentators suggest that smaller businesses may choose to follow suit.
We investigate the new ruling, define who’s affected, and ask why others my voluntarily join in.

Who’s affected by the law?

Officially named the Finance Act 2016, the ruling was given royal assent on 15th September 2016, and applies to a large business the beginning of its first financial year after that date.

Large companies (including partnerships) in this instance are classified as those with a turnover of more than £200m or a balance sheet above £2bn. It also covers companies for which there is a mandatory reporting requirement under the UK country-by-country reporting regulations.

A tax strategy must be published by the end of that first financial year, and updated on an annual basis no later than 15 months later than the previous year’s. The strategy must be published online, as its own document, and be easily found by the public.

Are other businesses affected?

HMRC has the power to impose fines on businesses that fail their obligation to publish a tax strategy. The fine starts at £7,500 if no strategy has been published within six months of the deadline, and then an additional £7,500 each month thereafter.

That’s not a huge figure for the types of businesses covered by the law (unless a group has a number of standalone entities that each fail to comply) but it’s thought the reputational damage will be the biggest factor as the HMRC will seek to ‘name and shame’ offenders, as it has recently been exposing organisations which fail to pay the minimum wage.

However, while it is mandatory for large businesses, many observers and commenters believe that it may be beneficial for other companies to voluntarily publish their own tax strategies.

Tax is widely recognised as a vital part of a country’s healthy economy, and the negative publicity garnered by organisations who test the rules, including Amazon and Vodafone, shows that the general population does care.

With that in mind, many other businesses may opt to bolster their strong brand values by publishing a tax strategy. Those involved in public sector procurement, those operating in the third sector, and even those wanting to promote a responsible outlook to the public, investors and the media can score points by doing so.

What goes into a tax strategy?

The goal of the ruling is to promote transparency over a company’s tax affairs and how they’re managed. It is, essentially, the boardroom’s view of paying tax, and it’s being made available to all.

A tax strategy will cover a number of elements, including its attitude toward paying tax and if it has a desired tax rate that it works to achieve, as well as its relationship with the HMRC and attitude to governance, and the level of risk that it is prepared to accept.

Additional information may include the board’s level of involvement in tax planning and risk management, systems and controls in place to manage both risk and tax levels, any motives behind tax planning activities, and how the organisations works with authorities to interpret the laws.

It’s possible to look inside existing tax strategy documents as some larger organisations already produce them, sometimes in the form of statements inside other financial documents, or as standalone pieces.

Well-publicised examples include those of Shell (which includes the line: “It is not the role of business to form views on what level of taxation is fair. It is the right of governments to draft tax laws accordingly.”) and Centrica (which states: “we do not enter into artificial arrangements in order to avoid taxation or to defeat the stated purpose of tax legislation.”)

Tax strategy best practice

There will, naturally, be a temptation to produce a ‘boilerplate’ statement which offers little by way of transparency or value to the reader. But remember, a good tax strategy can be a sound PR piece.

Therefore, it should reflect your overall brand values, and involve the input of all relevant stakeholders, even those working outside of the finance function.
And whatever is mentioned within the strategy should match up to other publicly available documents, such as annual filings and corporate governance reports.

The document itself can include supporting material, says the HMRC, if it helps clarify points or give context. Extra information can be used to boost evidence of a CSR agenda.

And in the spirit of true transparency, multinational organisations may choose to detail tax strategies for the other countries in which they operate, even though only UK affairs are covered by the law.

This is all important because an organisation’s tax strategy will not exist in a vacuum, it will be available along with other organisations in the same industry, including rivals and competitors. A business can benchmark its own strategy against what its peers publish, but so too can discerning customers and investors compare companies.

While it could seem that the Finance Act 2016 is yet another piece of mandatory paperwork for big businesses to manage, the truth is that tax is an important matter to the public, and a clear, honest and fair approach can be a positive for a business that sees and utilises a strategy’s value.