FD Intelligence

Tax governance – what is best in class?

Here’s why tax governance is important

Since the 2008 financial crisis, press coverage of several high profile tax avoidance cases, businesses appearing in front of Parliament’s public accounts committee and the OECD Base Erosion and Profit Shifting (BEPS) project have all increased the focus on tax governance and transparency.

Key points at a glance

  • Businesses must consider tax governance and have sufficient documentation of processes, controls testing and communication to give the business leaders clarity over any tax issues
  • Many of these principles reflect existing legislation for larger corporates
  • An appropriate way forward will be for large and SME groups to implement aspects of the best practice below as required to manage their business risks effectively

Why the increased focus now?

As a direct result of the public interest, HMRC (recognising that the Customer Relationship Manager (CRM) is not delivering the results intended) have established a new specialist tax governance team who assist CRM’s in carrying out the business risk review that large corporates undergo periodically.

Business risk reviews typically only impact groups with UK turnover over £200 million, however it is likely that this focus on tax governance will begin to filter down to include smaller businesses. Organisations should prepare for increased scrutiny by embedding a tax policy and making behavioural changes now. As a result, tax is now a boardroom agenda item, with management finding that the consequences of not complying are not just limited to their organisations: personal credibility is now at stake.

So what does best in class look like?

Each business will need to consider all taxes where they could be exposed to a risk, but as a starting point, at least corporation tax, employment tax and indirect taxes should be covered.

Businesses will need to understand what level of documentation over processes, controls testing and communication is required given your business’ facts and circumstances. A good starting point is the checklist together with the key sections listed below to understand where there may be gaps in your own governance around tax.

Checklist for best in class tax governance:

  1. Board reporting pack
  2. Tax governance framework
  3. Tax strategy approved by the board
  4. Tax code of conduct
  5. a) Internal control manual
    b) Internal audit resource
  6. Senior accounting officer procedures
  7. Tax risk register

1. Board reporting pack

As the key officeholders, there should be adequate tax reporting to the board, ensuring understanding of risk oversight and controls. The board should be informed on the following:

  • Tax governance framework
  • Adherence to the tax strategy
  • Tax risk register
  • Current relationship with local tax authorities
    • Update on tax compliance
    • Any open issues
  • Internal control improvements
  • Impact of key legislative changes
  • Financial statement tax disclosure
  • Effective tax rate

2. Tax Governance Framework

The framework (or scope) of tax governance is the responsibility of the board, with delegated responsibility to key individuals. It is important that business leaders understand their responsibilities. For example, as part of the government’s crackdown on tax evasion, businesses of all sizes must be aware of the Criminal Finances Act, under which businesses must ensure they have reasonable procedures in place to prevent tax evasion in the UK and internationally.

3. Tax strategy

The board should approve the tax strategy and it should include:

  • how the business manages tax risks
  • the business’ attitude to tax planning
  • specific tax issues or risks
  • relationships with tax authorities.

Once approved the tax strategy should be embedded in the business through a tax policy or code of conduct.

For businesses with a UK turnover in excess of £200 million, there is also a requirement in the UK to make the tax strategy publicly available incorporating the points noted above.

4. Tax code of conduct

To enable a business to operate their tax strategy, individuals within the organisation should adhere to a tax code of conduct. Fundamental principles of a tax code are aligned to the tax strategy and could include the following:

  • behave at all times with integrity
  • maintain objectivity
  • work with due care and competence
  • respect confidentiality
  • behave professionally
  • maintain technical knowledge
  • consult on significant issues

5. Internal control manual and process testing

An internal control manual should document key tax processes and controls. Ideally, the roles and responsibilities of each individual employee would be mapped, ensuring process and controls are effective in meeting their objectives.

Maintaining and monitoring business processes and controls are an important part of managing tax risks. To adequately monitor tax processes and controls, businesses use a combination of internal audit, external advisors and/or internal resources to provide comfort that the controls continue to be appropriate and are effective.

We see many businesses using internal audit as a cost effective way to manage controls and processes as well as ensuring key findings are reported directly to the board.

6. Senior accounting officer

For businesses whose UK turnover exceeds £200 million there is already an external requirement to monitor and self-certify to HMRC that the business has and maintains appropriate tax accounting arrangements in place to manage its tax risk. Over time, the threshold will likely be reduced to capture more businesses.

7. Tax risk register

A tax risk register helps the board understand the inherent and control risks in their business so they can be managed appropriately. An awareness of tax risks and the financial impact of a control failure in the business allows an already stretched finance/tax team to manage their time and resources.

With the ever-changing tax landscape, we recommend the board continually monitor tax risks by meeting at least quarterly and refresh the tax every 12 – 18 months.

So what does this mean for your business?

We find ourselves in somewhat of a new world, and the coming months are crucial in understanding how both HMRC and businesses choose to pragmatically manage and assess tax governance.

Whilst the level of documentation to support your attitude to tax risk will depend on the complexity of your business. It is abundantly clear that tax authorities will want to be satisfied that organisations are taking tax risk seriously in both the UK and globally.

In our next edition of FD Intelligence we examine how businesses are managing tax risks in their organisation.

For more information, or to discuss tax governance please contact James Titheridge or Alan Richardson.