UK’s Autumn Statement 2015 has been announced, with several measures aimed at changing corporate tax behavior and promoting transparency with the objective to achieve a modern and fairer tax system. A link to the Statement is provided for reference:
- A 60% penalty of tax due for successful general anti-abuse rule (GAAR) cases, to be implemented in 2016. The revenue impact of this measure is highly uncertain, as it is also meant to be an incentive to change corporate tax behavior.
- A desire to be to the most digitally advanced tax administration in the world.
- New criminal offense for corporates failing to prevent tax evasion; failure to prevent their agents from criminally facilitating tax evasion by an individual or entity.
- Hybrid mismatch rules to be effective 1/1/2017, following the OECD’s BEPS Guidelines.
- Corporates to publish tax strategies as they relate to, or affect, UK taxation.
- Cooperative compliance framework.
- “Special measures” regime to tackle businesses that persistently engage in aggressive tax planning.
A carrot, stick and transparency approach is contained within the Statement, and thus important to follow as other countries will surely review UK’s leading initiatives to gauge impact on their respective economy. The GAAR related penalty, which is inherently subjective, will be dictated in some fashion by HMRC’s aggressiveness to assess GAAR and a willingness to pursue it through the respective appeal avenues or court. The tax strategy initiative will also be interesting to monitor as to its breadth and potential impact upon a company’s risk rating.
HMRC has issued consultation documents proposing requirements to publish a “tax strategy,”, voluntary Code of Practice corporate tax processes and creation of a “special measures” regime. Comments are due by 14 October 2015 for each Consultation document.
These proposals follow closely upon the heels of the ATO issuance of Best Practice methodologies addressing a taxpayer’s tax risk.
Three documents are provided for reference: (1) A Clifford Chance Briefing note, (ii) HMRC’s Consultation document for Improving Large Business Tax Compliance and (iii) HMRC’s Consultation document on Strengthening Sanctions for Tax Avoidance.
- Public availability of a company’s tax strategy (financial penalty for non-disclosure) including:
- Tax internal governance arrangements
- Risk management approach
- Tax planning attitude and tax risk appetite, including affirmation that it aims to satisfy the spirit, as well as the letter of the law
- Attitude to relationship with HMRC
- Target UK effective tax rate (if applicable), and what measures are being taken to achieve it
- Voluntary Code of Practice, including affirmations that:
- Tax planning is consistent with the economic consequences
- Transactions provide a tax result that is in accordance with the intentions of Parliament: “HMRC will consider a purposive construction of the legislation, and will also consider whether Parliament can realistically have intended to give the proposed result in circumstances that are very different from those that prevailed at the time”
- Transparent relationship is maintained with HMRC
- Tax obligations are met
- Early dialogues for engagement with HMRC to discuss tax planning, strategy, risk, significant transactions and full disclosure of areas providing significant uncertainty
- Objective evidence is provided to HMRC that decisions with tax implications have been approved by a senior decision maker
- Special Measures for companies entering into aggressive tax planning / failing to transparently engage withHMRC, including:
- Providing all documentation (including third party tax advice) related to tax
- Refusal to provide non-statutory clearances
- Public naming
- Automatic 100% tax penalties
Observations in the Documents:
- Attitudes to tax avoidance and aggressive tax planning have altered significantly, including political interest
- Intention is to create Best Practices
- The Government is awaiting the EU Tax Transparency Package consultation, and will consider its findings carefully
- Proposal is separate from the current SAO regime, as well as the OECD’s country-by-country reporting guidelines
- A company could be required to state in their tax strategy whether they are a signatory to the Voluntary Code of Practice
- Non-publication of a tax strategy will be a consideration of HMRC’s tax risk reviews
- Evidence of “governance in action” to be provided
- Voluntary Code of Practice is aimed at tax planning that crosses over into tax avoidance
- The company should reasonably believe that transactions give a tax result which is not contrary to Parliament’s intentions
- Special measures will remain for a minimum of 2 years
A higher standard of tax excellence is being demanded by public pressures and tax administrations in the form of an objective tax risk framework overseen at the Board level and subject to internal control testing. HMRC’s proposals are being followed by other countries worldwide, and similar measures would not be unexpected in other jurisdictions. Accordingly, all interested parties should review the documents, and provide comments thereto.