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Compliance Risk Management: Progress so far

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21st Aug 2008
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In recent months there has been a recognised change in HMRC’s approach to compliance risk management for large businesses, including the December 2007 published report on guidance for LBS customers and staff.

What do we mean by compliance risk? Well, in HMRC’s view, compliance risk is the likelihood of failure to pay the right tax at the right time, or of not understanding what the right position might be.

What has been the impetus for this change? There have been concerns dating back to 2006 that HMRC was often inconsistent in its approach to large businesses and as a result of the criticism, the Government appointed Sir David Varney to undertake a review of the relationship between large businesses and HMRC.

The Varney report highlighted that both HMRC and taxpayers wished to have greater certainty in their relationship, a speedy resolution of issues and an efficient risk-based approach to dealing with tax matters. As a result, the report recommended the implementation of a risk based approach to enquiries by 31 December 2007.

Following the report, in March 2007 HMRC issued a document setting out their approach to compliance risk management for large businesses as a key part of its strategy for supporting UK business as a whole. The document confirmed that, where it is believed that a company is not managing its own tax compliance risks adequately, or is repeatedly pushing at the boundary of the law, HMRC will intervene quickly and intensively. However, where it is believed that a company is low risk, they do not want to second-guess the company’s decision-making and therefore interventions will be limited.

However, what determines a company’s risk rating? There are numerous factors affecting HMRC’s decision which are decided on a case by case basis, but there are certainly some common factors (both internal and external to the company) which increase the likelihood of a company being deemed high risk. These can include:

  • Size, structure and complexity of the business, including the level of UK profits and losses, the scale of Corporation Tax at risk, acquisitions and disposals and international activities
  • Tax governance such as the management of tax risk and the adequacy of skilled resources in the tax department
  • Financial arrangements, are they complicated or straight forward?
  • Avoidance schemes, does the business make frequent use of avoidance schemes?
  • Strength of underlying systems, are the Corporation Tax returns accurate or are there known problems with the accounting system?
  • Legal complexity and challenges
  • Co-operation with HMRC, is the business prompt and co-operative or obstructive and litigious

Now that companies have been notified of their risk ratings, many have already started to experience changes in dealings with HMRC, most notably those deemed low risk companies. HMRC are reducing queries and interventions into relatively routine exercises, and companies have an increased sense of comfort in their tax filing as a company’s rating impacts on the way in which HMRC assesses tax returns. Low risk companies can expect that their returns and declarations are unlikely to be challenged and that the majority of interaction with HMRC will take place in real-time as issues arise through the clearance system.

So how does HMRC’s approach differ with higher risk businesses? Well it is likely to be a planning point for many companies to review their systems in an effort to reduce their risk rating, if the level of interaction envisaged by HMRC is dependant on the risk assessment. Higher risk businesses have been experiencing more regular risk based intervention and enquiry from specialist HMRC resource, detailed investigations and more regular risk reviews.

So several months on, how is the new risk based approach working in practice, and has it met the concerns of business established in the Varney report? The general feedback seems to be that the scheme is working and companies seem to be relatively pleased with the changes, although the impact of the scheme will vary between companies. One perceived advantage of the framework is that it does allow for an improved allocation of resource within HMRC, as staff and specialists are directed more appropriately. Higher risk businesses will have designated customer relationship managers who work with them to resolve any outstanding issues. However, one criticism of the scheme which has been raised is the question of whether there is a relationship between a company’s tax paying status and their risk rating. Is it possible for a company that pays significant amounts of tax to be low risk? It will certainly be interesting to see whether higher risk companies who are advised by HMRC on ways to reduce their risk score actually move to a lower risk score, particularly if they are large taxpayers. Certainly with the regular review of risk ratings those companies currently enjoying a low risk score should not be complacent.

Bourne Business Consulting LLP, based in London, was named Best Tax Team in a Boutique Firm as part of the Lexis Nexis Taxation Awards 2007. For more information, contact Bourne on 0207 960 2730 or visit www.bournebc.com.

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