Andrew Hinsley

Written by: Andrew Hinsley

Andrew Hinsley


Taming tax complexity

Today’s tax environment

Einstein said, ‘the hardest thing in the world to understand is tax’ and every year it seems to get harder. The rules frequently change and continue to expand at a seemingly exponential rate, (now over 21,000 pages and 10 million words). Finance functions face change overload where nothing seems to get easier after the change. On top of this, HMRC continues to raise the bar in terms of expectations of tax compliance processes and how these can be evidenced to its satisfaction. Add to this overseas tax complexity and the difficult seems impossible.

Struggling to cope?

Finance teams looking for a means to navigate the complexity may struggle to know where to start, have no clear idea of ‘what good looks like’ or simply struggle to find the time to capture what is kept in peoples’ heads. As a result, issues such as fire-fighting, re-inventing the wheel, key-person risk and, most significantly, a potential build-up of a latent tax exposure, including penalties, can arise, as well as falling short of HMRC’s tax governance expectation.

It is a lot easier to manage change from a solid foundation. Information that only stays in a person’s head is no use when people move on or when HMRC asks to see written evidence of the procedures and processes in place, an increasingly common request.

A tax navigation system

It’s not all bad news and despite Einstein’s difficulties, not everything tax related is complex; some matters remain relatively straightforward. The key is matching the appropriate resource to deal with the risk, whether that is internal, external or a co-sourced combination. 

So how do companies remain effective in managing tax complexity to optimise their tax position whilst meeting all their compliance obligations? The answer lies in a structured approach which breaks down the seemingly unmanageable into the manageable. This structured approach should:

  • systematically break down tax risk arising from tax sensitive transaction activity across all tax areas into manageable sub-categories;
  • determine what policies, procedures, processes and related tasks are needed to address the tax risks identified;
  • assess the resource needed (both internal and external) to manage these tax risks; and
  • ensure periodic monitoring to check the relevant tasks are completely effectively.

A simple to-do list is a common recognisable example of introducing some structure to help identify and track tasks. A tax risk control framework is a more sophisticated approach to identifying what needs to be done and managing how it is performed. It starts with ‘what could go wrong’ from a tax perspective, and addresses how this is prevented by assessing what business information needs to be captured and analysed for tax purposes.

The tax risk framework, once created through this process, enables the necessary policies, procedures, processes and responsibilities to be mapped to the specific tax risks they are meant to address to ensure there are no gaps. This structured approach also enables a meaningful assessment of the resources required (people, processes and systems) to deliver tax objectives in the most efficient manner. New risks and related tasks become easier to track and key tax knowledge is retained in the business which can be built on year on year.

Your tax risk framework should enable you to address the following questions:

Business activity

  • Who creates tax risks in the business?
  • How is it created through the activity and transactions they generate? 

Tax footprint

  • What tax rules apply to the business activity and resulting transactions?
  • How complex are these rules and what resource is required to address them? 

Transaction recording and communication

  • Where and how are the activities/transactions recorded in the systems and records? 
  • How is information impacting tax risk communicated to ensure those responsible can correctly apply the tax rules?

Tax governance and risk management

  • Has management set the strategic tax principles, objectives and expectations and communicated this to the wider business?
  • Are resources (people, policies, procedures, processes and systems) available commensurate with the business’ tax risk footprint? 

Operational effectiveness

  • Are resources effectively deployed? 
  • Will HMRC be satisfied with the evidence of tax governance and processes? 

Tax is complex, of that there is no doubt, and the risks associated with it are increasing, so now may be the time to reassess your approach because despite the challenge, it can be effectively managed with a structured approach. In our experience, more and more businesses are seeking to address these issues by designing and maintaining appropriate tax control frameworks. If you would like to learn more please contact Andrew Hinsley.

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