Complexity in store for large company tax reporting

02 December 2023

With the 2023 accounting period end for many large companies just a few weeks away, tax reporting teams are set to have to deal with the new ‘pillar two’ rules, which will apply in the UK for accounting periods beginning on or after 31 December 2023. The pillar two tax rules are broadly based around ensuring that groups have an effective tax rate at or above 15% in all the tax jurisdictions they operate in globally. The complexity of the tax rules is increasingly matched by the many developments in the reporting environment.

In recent weeks, there have been a number of developments affecting the reporting requirements of large corporates. On 16 October 2023, the government withdrew draft regulations published in July that would have required large UK listed and private companies to include additional elements in their corporate reporting, including an annual resilience statement. The withdrawal of the regulations was on the back of consultation with companies which raised concerns about imposing additional reporting requirements. The Department for Business and Trade press release noted that, ‘instead, the government will pursue options to reduce the burden of red tape to ensure the UK is one of the best places in the world to do business.’

Then, on 18 October 2023, the Financial Reporting Council (FRC) launched a consultation to ‘strengthen auditor requirements to detect and report material misstatements from non-compliance with laws and regulation…’ One key element of the proposals being put out for consultation is, ‘implementing a more risk-based approach…[which] allows the auditor to exercise professional judgment and choose which audit procedures will be most effective in the circumstances.’

While one or both of these developments may be welcome to a number of business stakeholders, they are a further reminder of the constantly evolving world of corporate accounting, reporting and auditing requirements.

Set against this changing backdrop, many large groups (and audit firms) will be gearing up for new targeted disclosure requirements around the pillar two rules. The disclosure requirements are effective for annual reporting periods beginning on or after 1 January 2023, meaning for many groups this is something they will need to factor into their imminent year end group reporting in January 2024.

The pillar two rules are complex – so much so that there is a temporary exemption from having to include pillar two disclosures around deferred tax while certain considerations are clarified or ironed out.

Corporate groups, auditors, investors and other stakeholders in large businesses will have to knit together technical and risk-based assessments to ensure appropriate governance and disclosures around the new accounting and tax rules. Companies should work now to: identify potential areas of complexity around pillar two; devise appropriate process steps and controls to build their Pillar 2 governance, including supporting stakeholder engagement throughout the setup process; and, model the pillar two rules to facilitate informed discussions around their financial statements.

One thing is for sure – the already difficult job for businesses of ensuring their effective tax rate remains in line with market announcements and expectations is not going to get any easier.