HMRC has announced that it will undertake a review of how it manages large business risk. This will involve HMRC consulting with businesses over the summer on its process for risk profiling large businesses and promoting stronger compliance.
The importance of tax risk identification
HMRC’s stated strategy is to target its resource to risk. Risk profiling is a key part of that strategy.
What happens now
HMRC currently risk assesses a business by:
- identifying the inherent tax risk arising from a company’s transactions, operations and geographic locations;
- establishing whether that inherent risk is increased by the business’ behaviour (eg by undertaking tax avoidance or adopting aggressive tax positions); and
- considering how well that inherent tax risk is managed by the business.
HMRC currently profiles the business from a variety of data sources including: data mining and human review of tax returns and accounts; its connect system; its business tax compliance review process; the internet; compliance history and information held on file.
In 2016 HMRC reinforced existing measures aimed at promoting better compliance with a new requirement to publish the business’ tax strategy. This includes its approach to accepting and managing tax risk, its attitude to tax planning and approach to dealing with HMRC.
Risk working in practice
HMRC’s targeting of resource to companies entering tax avoidance arrangements has been very effective in increasing the tax yield. Transfer pricing and diverted profits tax are likely to be the next big targets. Country-by-country reporting will provide valuable tax risk profiling information against which to target additional resource.
With all this in place large businesses may be forgiven for thinking that HMRC has all it needs but it seems improvement is still being sought. This perception may arise from HMRC’s increased scrutiny of business governance and processes to manage tax risk. Indeed, last year HMRC handed out a record number of fines for senior accounting officer failures. We expect to see similar scrutiny of claims in tax strategy documents regarding the effectiveness of tax compliance processes to ensure they can be backed up in practice. Better profiling may target some of these reviews.
Threat or opportunity?
The use of risk profiling data without the safeguard of review by experienced officers will be a recipe for disaster.
Also, if HMRC target companies based on an inherent risk profile alone without regard to how well that risk is being managed that ignores a crucial factor in determining where HMRC puts its resource. It is a common complaint by companies that officers will not give a low risk status because of the company’s complexity. This is not how the system is supposed to work.
On the other hand, if better profiling leads to more effective use of HMRC resource and avoids unnecessary interventions on low risk businesses, that is to be welcomed.
Companies may wish to revisit their risk profile. Is it where they want it to be in light of the ever increasing scrutiny and sanctions? If not what measures might they wish to take to lower it?
For further information, lease contact Andrew Hinsley or your usual RSM advisor.