29 June 2022
With businesses coming under greater scrutiny from HMRC, tax governance can no longer sit in isolation and must form part of a firm’s overall governance strategy.
The increasing complexities of today’s regulated financial and tax environment mean more challenges to businesses. In order to operate effectively and legally, it is critical that organisations – regardless of their size – are able to navigate the regulations and compliance requirements and abide by them. The risks of non-compliance can have significant financial and reputational repercussions. These compliance and reputational pressures also exist for family offices and their clients. Scrutiny of the way in which wealthy individuals conduct their tax affairs is intensifying, especially in the current economic climate. No need to look further than the row around the tax position of Akshata Murty, Chancellor Rishi Sunak's wife, after it was revealed that she has non-domiciled status for UK tax purposes on foreign income. As an Indian citizen she will be exempt for inheritance tax, potentially saving her £280m in UK tax.
Various celebrities have had to settle tax liabilities they had previously avoided by investing in tax planning arrangements that may technically be legal, but which HMRC views as forms of aggressive tax avoidance (eg investments in data centres and film LLPs).
Financial crime regulations that include anti-money laundering and Know Your Client procedures are one aspect of these compliance requirements. But it does not stop there. It includes tax evasion and even its facilitation. Since the introduction of the Criminal Finances Act 2017 (the CFA), HMRC has multiplied its investigations to ensure that relevant organisations have robust processes to prevent the criminal facilitation of tax evasion by their associated persons – including their staff, their suppliers and any other person performing services for or on their behalf.
The only defence against a criminal charge is that the organisation has implemented reasonable prevention procedures. Without any such defence, firms can face a criminal conviction and an unlimited fine, not to mention reputational damage.
In addition, the global tax landscape has evolved to include exchange of information mechanisms, such as the Common Reporting Standards and FATCA, or the disclosure of beneficial owners through the implementation of the UBO register by the Anti Money Laundering Directives. The focus is on corporate behaviour and tax transparency.
Effective tax risk management and good governance are the pillars of all successful organisations
The complicated and increasing connection between tax and regulatory considerations mean that tax governance cannot be considered in isolation from overall business governance. The organisation’s risk appetite assessment must include a tax strategy.
It is critical that a firm’s governance and tax risk management framework is regularly reviewed and remains relevant. The FCA expects senior management to take clear responsibility for managing financial crime risks. More importantly, there needs to be evidence that senior management is actively engaged in the firms’ approach to addressing the risks. Similarly, HMRC in the UK and other tax or supervisory authorities worldwide expect tax compliance to be part of the board’s responsibilities.
To prevent unexpected adverse tax consequences, any organisation that has a national or an international presence needs to ensure that the advice it gets from advisers in one jurisdiction is tailored to cover the position of the organisation’s clients internationally. Equally, organisations that provide their clients with investment advice must be careful that its advisers do not provide tax advice. The line between the two is fine, and easy to stray over.
What we can do at RSM
RSM can help you to get the most value out of your governance and tax risk management framework. We can review, design and implement practical and proportionate governance and tax risk management solutions. We can work alongside your existing compliance team to review your existing procedures and policies, advise on creating a proactive rather than reactive tax strategy, and provide training to share knowledge across your organisation.