Higher tax scrutiny – professional service firms beware

HM Revenue & Customs (HMRC) have put tax governance and avoidance at the top of their agenda. Professional service firms are finding themselves under pressure to publish their tax strategy and ensure they're not party to tax avoidance schemes

The latest HMRC consultation paper on tax avoidance schemes has received criticism from the professional service sector for its lack of clarity and many advisers are concerned that legitimate tax planning schemes could now be caught under the proposed legislation. The threat is magnified considering HMRC will name non-compliant advisers, resulting in reputational damage

Requirements to publish a tax strategy

The HMRC's Finance Bill 2016 included guidance requiring businesses to publish a tax strategy if in the previous tax year the business had either:

  • a turnover above £200 million
  • a balance sheet over £2 billion

The tax strategy will provide details of the business' tax arrangements with HMRC. Businesses won't have to disclose the amounts of tax paid or commercially sensitive information.

Businesses that have a HMRC Customer Relationship Manager will not be excluded from publishing their tax strategy online. The strategy should include the following:

  • how the business meets its requirement to work with HMRC
  • how they work with HMRC on:
    • current, future and past tax risks
    • tax events
    • interpreting tax law

The tax strategy must be published before the end of the business' first financial year commencing after the Finance Bill 2016. They will need to publish a tax strategy annually and within 15 months of the previous strategy.

If a business fails to publish their tax strategy, HMRC will issue a 30 day warning notice. If no action is taken, penalties for the first six months will be up to £7,500 with a further £7,500 due if the tax strategy is not available within 12 months. After 12 months, HMRC will charge a further £7,500/month for each month the tax strategy remains outstanding.

Large businesses are not alone. Mid-sized businesses are also under the HMRC microscope. A similar initiative targeted at businesses under the threshold is imminent.

HMRC publishes consultation on strengthening tax avoidance sanctions and deterrents

HMRC have increased their scrutiny on the tax profession and those individuals that use tax avoidance schemes; with tax avoidance estimated to cost the Treasury £2.7 billion per annum.

HMRC published an important consultation document on 17 August 2016. The consultation included proposals for strengthening deterrents and sanctions for those who design, market or facilitate (enablers) the use of tax avoidance arrangements and those that use these tax avoidance arrangements which are later defeated by HMRC.

The consultation suggests that the penalties for both the enablers and users of these tax avoidance arrangements could be liable for up to 100% of the understated tax. HMRC will also name the enablers in "the interest of alerting and protecting taxpayers who play by the rules".

The consultation has already generated a large amount of media coverage and has been criticised for its lack of clarity.

Grant Thornton submitted a response which was due by 12 October 2016.

Consultation – partnership taxation: proposal to clarify tax treatment

The government issued their consultation document on how partnerships calculate their tax liabilities in the recent budget announcements on 9 August 2016. This consultation is relevant for general, limited and limited liability partnerships, including foreign entities classed as partnerships for UK tax purposes, and seeks to clarify five key areas that are seen as providing uncertainty. These five key areas include the following:

  • clarification of who is the partner chargeable to tax
  • business structures that include partnerships as partners
  • investment income – tax administration
  • trading and property income – tax administration
  • allocation and calculation of partnership profits

Grant Thornton is drafting a response with the closing date for comments being 1 November 2016.