HM REVENUE & CUSTOMS. Management of large business Corporation Tax

Transcription

1 HM REVENUE & CUSTOMS Maagemet of large busiess Corporatio Tax REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 614 Sessio July 2007

2 The Natioal Audit Office scrutiises public spedig o behalf of Parliamet. The Comptroller ad Auditor Geeral, Sir Joh Bour, is a Officer of the House of Commos. He is the head of the Natioal Audit Office, which employs some 850 staff. He, ad the Natioal Audit Office, are totally idepedet of Govermet. He certifies the accouts of all Govermet departmets ad a wide rage of other public sector bodies; ad he has statutory authority to report to Parliamet o the ecoomy, efficiecy ad effectiveess with which departmets ad other bodies have used their resources. Our work saves the taxpayer millios of pouds every year. At least 8 for every 1 spet ruig the Office.

3 HM reveue & Customs Maagemet of large busiess Corporatio Tax LONDON: The Statioery Office Ordered by the House of Commos to be prited o 23 July 2007 REPORT BY THE COMPTROLLER AND AUDITOR GENERAL HC 614 Sessio July 2007

4 This report has bee prepared uder Sectio 6 of the Natioal Audit Act 1983 for presetatio to the House of Commos i accordace with Sectio 9 of the Act. Joh Bour Comptroller ad Auditor Geeral Natioal Audit Office 17 July 2007 The Natioal Audit Office study team cosisted of: David Alle, Craig Adams, Aa Ward, Sarah Pearcey ad Tom Wallace, uder the directio of Jae Wheeler This report ca be foud o the Natioal Audit Office web site at For further iformatio about the Natioal Audit Office please cotact: Natioal Audit Office Press Office Buckigham Palace Road Victoria Lodo SW1W 9SP Tel: equiries@ao.gsi.gov.uk Natioal Audit Office 2007

5 CONTENTS SUMMARY 4 PART ONE Admiisterig large busiess 9 Corporatio Tax The Departmet s ew approach to maagig 10 large busiess Corporatio Tax Corporatio Tax reveues from large busiesses 10 The costs of maagig large busiess 12 Corporatio Tax PART TWO maagig risks to Corporatio 13 Tax reveues The Departmet s approach to maagig risk 13 2a) Focusig equiry work o the key risks 13 to tax reveue 2b) Speedier resolutio of equiries 18 2c) The Departmet s work to tackle Corporatio 19 Tax avoidace 2d) Workig more collaboratively with large 20 busiesses ad their tax advisers PART THREE measurig ad maagig performace 23 Departmetal targets 23 Itervetio yield 23 The Corporatio Tax gap 24 PART FOUR Departmetal staff skills ad resourcig 25 Staff cotiuity plaig 25 Buildig staff skills, idustry kowledge 26 ad experiece Career progressio 27 APPENDICES 1 Natioal Audit Office methodology 28 2 Corporatio Tax: Compaies maaged by 32 Hm Reveue & Customs Area Offices 3 Risk estimates ad equiries 34 4 Review of liks with large busiess 37 5 Disclosure of direct tax avoidace schemes 38 Photographs courtesy of

6 SummARy 1 Large busiesses are a importat part of the Uited Kigdom taxpayer populatio. Because of their ecoomic sigificace ad complex tax affairs, HM Reveue & Customs (the Departmet) deals with some or all of the taxes for 2,400 of the largest busiesses through its Large Busiess Service. The Large Busiess Service deals with Corporatio Tax for 700 of these busiesses. Of aroud 1,800 staff withi the Large Busiess Service, 600 staff are egaged i maagig large busiess Corporatio Tax at a cost of 30 millio a year. 2 Sice the merger of the Ilad Reveue ad HM Customs & Excise i 2005, the Departmet has bee reviewig how it delivers services to large busiesses. I April 2006, it implemeted a ew operatig model based aroud cliet relatioship maagers for each busiess ad itroduced idustry sector groupigs. I November 2006, Sir David Varey preseted his Review of liks with large busiess, produced i respose to cocers about the relatioship betwee busiesses ad the Departmet. As a outcome of the review ad drawig o chages already uderway, the Departmet has adopted proposals to trasform the way it deals with large busiesses. The key proposals are: Improved customer relatios ad service. Greater certaity for busiesses over tax due. A efficiet risk-based approach to dealig with tax matters. 4 management OF LARGE BuSINESS CORPORATION TAX

7 summary Summary text cotiued Beefits for busiesses that egage i low risk behaviour. Speedy resolutio of issues ad movig to a culture of real time equiries. 3 These chages are at the core of the Departmet s ew approach to maagig large busiess Corporatio Tax. They are aimed at improvig the relatioship betwee large busiess ad the Departmet, the efficiecy ad effectiveess of the admiistratio of the tax system, ad are directed at maitaiig ad ehacig the attractiveess of the Uited Kigdom as a place to do busiess. This report cosiders the Departmet s progress ad specifically covers: Admiisterig large busiess Corporatio Tax (Part 1). Maagig risks to Corporatio Tax reveues (Part 2). Measurig ad maagig performace (Part 3). Departmetal staff skills ad resourcig (Part 4). Details of our methodology are i Appedix 1. For the purposes of this report, large busiesses are those admiistered by the Large Busiess Service. Coclusios 4 I , large busiesses paid 23.8 billio i Corporatio Tax, represetig 54 per cet of the 44.3 billio Corporatio Tax raised from all 1.8 millio icorporated busiesses i the Uited Kigdom. The large busiess compoet was over 0.5 billio lower i real terms tha i the previous year. The Departmet believes this is largely a result of chages i the ecoomy ad the impact of policy measures. The additioal tax (or itervetio yield) raised from the Departmet s compliace work has raged from 1.9 billio to early 2.7 billio over the four years to The Large Busiess Service has a iteral milestoe of a additioal 843 millio itervetio yield by above the baselie. I , the Departmet reported a additioal yield of 730 millio agaist a iteral milestoe of 821 millio for that year. However, the additioal yield reported each year may fluctuate widely as a sigificat proportio of the yield comes from a small umber of large cases ad the total yield each year will deped o the dates whe large cases are settled. 5 Busiesses are etitled to pla their affairs to miimise tax liabilities withi the rules. The Departmet aims to collect the right tax at the right time. To do so, it must verify large busiesses self-assessmets of their Corporatio Tax liabilities i a eviromet of globalisatio, sophisticated tax plaig ad complex tax legislatio. I this eviromet, there ca be differet iterpretatios of tax legislatio ad what elemets of tax plaig are legitimate. This creates greyess aroud what is the right amout of Corporatio Tax each busiess should pay ad builds tesio betwee the Departmet ad large busiess. The proposals i Sir David Varey s review aim to reduce this greyess, improve the relatioship betwee the Departmet ad busiesses ad icetivise busiesses to maage their tax affairs i a way that presets a low compliace risk. 6 The Departmet is i a trasitio phase as it cotiues to implemet its ew approach. It has appoited a cliet relatioship maager for each busiess, who is resposible for maagig the relatioship ad evaluatig busiess risks. It has developed a structured framework for estimatig Corporatio Tax risks across the large busiess populatio ad a maagemet iformatio system to record the ature ad estimates of the maximum tax at risk for each large busiess (the tax uder cosideratio). It has begu to reduce the umber of log ruig equiries. I , it closed over 1,700 equiries five years old or more, givig busiesses greater certaity over their Corporatio Tax positio. The Large Busiess Service udertakes equiries to validate the accuracy ad completeess of some Compay Tax returs. It has also begu a programme i which its seior maagemet egage directly with maagemet boards of busiesses with high risks to Corporatio Tax, to chage their behaviours ad approach to tax risks. As at May 2007, this programme ivolved busiesses which collectively have several billio pouds of Corporatio Tax uder cosideratio. Maagemet of large busiess Corporatio Tax 5

8 summary 7 However, the Departmet has further to go to implemet fully its ew approach. Departmetal staff are still carryig out a large umber of low value equiries o busiesses. I February 2007, 58 per cet of ope equiries were expected collectively to produce less tha oe per cet of the total additioal tax yield geerated from compliace activities. Departmetal tax specialists have show some reluctace to stop equiries ito low levels of tax, regardless of resource availability to maage a equiry properly to completio, as their operatioal culture promoted opeig equiries wheever they saw tax at risk. Withi the Departmet, there is some ambiguity over what is low risk ad low value, which hiders the move to focus o high risk equiries. The culture of opeig equiries eve where low amouts of tax are at risk has resulted i large umbers of ope equiries (4,700 at February 2007). I additio, the Departmet still has sigificat further work i settlig log ruig equiries, as early 1,700 ope equiries are five years old or more. I May 2007, the Large Busiess Service issued ew guidace o what costitutes low risk, ad is i the process of developig targets for to reduce the umber of low risk ad old equiries. 8 Other tax authorities face similar issues i developig ad refiig methods of risk assessmet. The Australia Taxatio Office has implemeted, ad the Caadia Reveue Agecy is i the process of implemetig, a methodology for calculatig the effective tax rate of idividual busiesses ad comparig it to the statutory rate as a meas of differetiatig high ad low risk busiesses. The effective Corporatio Tax rate of a busiess is its Corporatio Tax liability declared as a percetage of pre-tax compay profit. While usig effective tax rates ca help idetify busiesses that pose higher or lower tax risks ad provides a tool to assist i prioritisig resources, it is still importat to have a good uderstadig of the busiess, its idustry, its profit drivers ad its tax plaig for major trasactios. 9 The Departmet s appoitmet of cliet relatioship maagers is a crucial elemet i deliverig the ew approach. The role provides a sigle poit of cotact for busiesses ad offers the Departmet a meas of developig detailed kowledge of each busiess. Large busiesses support the priciples behid the role ad welcome a more collaborative approach. However, some large busiesses believe that the Departmet s old eforcemet culture still exists. The Departmet recogises it eeds to make sigificat shifts i iteral attitudes ad behaviours to achieve the ew relatioship ad attai a culture of cooperatio with busiesses. Egagig frotlie staff with the aims of the ew approach is essetial i implemetig the chages successfully. Similarly, busiesses ad their tax advisers also recogise their eed to work with the Departmet to implemet the proposals ad achieve the beefits from a more collaborative approach. 10 There are wide ragig attitudes amog large busiesses towards compliace with Corporatio Tax, i their use of avoidace schemes, complexity of legal structures ad cooperatio with the Departmet. The Departmet is achievig promisig early results from its high risk corporates programme of egagig directly with maagemet boards of busiesses with the highest risks to compliace with Corporatio Tax. This aims to chage their behaviour, reduce their risk levels ad resolve major equiries. But there are opportuities for the Departmet to publicise this programme more widely as a example of its approach to dealig with high risk busiesses. Similarly, the Departmet was slow to commuicate its ew litigatio strategy, which focuses o recoverig the full amout of tax where it has a strog legal case ad droppig cases where argumets are weak. Some busiesses withi the Large Busiess Service were uclear about this approach. 11 It takes Departmetal staff a cosiderable period of time ad traiig to build up the requisite kowledge ad experiece to maage the issues arisig from large busiess Corporatio Tax. Large busiesses attach cosiderable importace to Departmetal staff havig good kowledge about their idustry ad familiarity with their busiess. Yet they cosider cliet relatioship maagers ad tax specialists do ot always have sufficiet kowledge or expertise to liaise as equals with the staff of their tax departmets. The Departmet cosiders skill levels ad traiig to be oe of the key challeges to deliverig its ew approach, particularly if the staff are goig to tackle more difficult, complex ad higher value equiries. The loss of key seior staff over the ext te years is a cocer to both large busiesses ad the Departmet. The Departmet does ot have a log-term strategic pla to build ad maitai the staff capacity ad skills withi the Large Busiess Service. However, the Review of liks with large busiess, proposes staff should be equipped with the skills ad competecies eeded to deal with complex tax matters through techical traiig ad joit workig with the private sector ad the Departmet has recogised the eed to develop further staff skills ad experiece. 6 Maagemet of large busiess Corporatio Tax

9 summary 12 The Departmet eeds relevat performace measures to assess the impact of its compliace work. For 2005 to 2008, the Departmet has a Public Service Agreemet target to reduce by 3.5 billio by March 2008, the aual uder-paymet of direct taxes ad Natioal Isurace cotributios. The Departmet s primary measure for large busiess Corporatio Tax compliace work, which feeds ito the Public Service Agreemet target, is itervetio yield. However, itervetio yield has drawbacks as a idicator. It does ot give ay idicatio of the overall level of tax compliace; it captures mostly eforcemet activity rather tha the outcome of prevetive measures that secure compliace; ad most importatly, it teds to reiforce a culture of focusig o lower value equiries, which offer greater certaity, to meet overall yield targets. The Departmet uses itervetio yield i lieu of a robust measure of the tax gap (the differece betwee the amout the Departmet collects through routie compliace ad the total theoretical liability if all taxpayers were fully compliat with Corporatio Tax legislatio.) It has udertake research ito estimatig a tax gap, but is uable to produce robust results because of the lack of verifiable data. Its maagemet iformatio system, which collates the total maximum estimate of tax uder cosideratio, offers the Departmet the opportuity to develop a overall measure of compliace. Overall coclusio 13 The admiistratio of corporate taxes i a globalised eviromet presets sigificat challeges. The Departmet is makig progress i a umber of areas. It is itroducig chages to improve its workig relatioships with large busiess ad to improve compliace. It is assessig Corporatio Tax risks i a more structured way, is settlig old equiries, is tacklig major tax risks with high risk busiesses, icludig ivolvig their maagemet boards to chage their behaviour, ad has appoited cliet relatioship maagers. There is scope for further progress. To implemet fully its ew approach, the Departmet must cotiue to embed the ecessary cultural ad behavioural chage i the everyday practice of its staff. It also eeds to develop a log-term pla for buildig staff skills ad capacity o large busiess activities ad to develop a set of performace measures that capture the outcomes of its activities. Improvig commuicatios about its cocetratio o high risk busiesses ad the litigatio strategy will help busiesses uderstad better the Departmet s focus ad demostrate its ew approach. I deliverig the ew approach, there are opportuities for the Departmet to icrease large busiesses, tax advisers ad its ow staff s uderstadig ad acceptace of the processes uderway through better articulatio of its goals, priorities ad accoutability. Recommedatios 14 Our recommedatios aim to develop further the Departmet s effectiveess i maagig large busiess Corporatio Tax. We recommed that the Departmet should: i ii iii iv v vi vii provide a overarchig framework for large busiess Corporatio Tax to brig together the broad rage of iitiatives uderway, to improve delivery, coordiatio ad accoutability (paragraphs 1.9 to 1.10, 2.9, 2.19 to 2.20, 2.23, 2.27 to 2.28, 2.31, 2.34, 2.40 to 2.44 ad 4.4); ivest i a chage programme delivered to Departmet staff to esure they uderstad ad implemet the ew approach to developig workig relatioships with busiesses ad focus o high levels of tax risk (paragraphs 2.13, 2.37 to 2.38); fully implemet guidace for tax specialists o whe a tax risk is material, to improve the focus o high risk busiesses ad equiries (paragraphs 2.21 to 2.23); prevet staff opeig equiries without a estimate of the amout of tax uder cosideratio, the resources available to complete the equiry i a timely maer ad maagerial approval. This will further assist the shift towards focusig o high risk busiesses ad equiries (paragraphs 2.6 to 2.11); through its cliet relatioship maagers, improve the relatioship with tax advisers to eable ad ecourage their cliets to chage their behaviours ad attitudes to tax risks ad icrease the proportio of busiesses with a low risk status (paragraphs 2.33 to 2.35); assess the usefuless of moitorig busiesses effective tax rates over time, as a idicator of potetial compliace risk behaviour ad to develop better uderstadig of the drivers behid these rates (paragraphs 2.14 to 2.18); develop a set of performace measures, buildig o those which have bee developed as a result of Sir David Varey s Review of liks with large busiess. These measures should iclude: a overall compliace measure for large busiess Corporatio Tax. This may iclude usig its maagemet iformatio system data to develop a bottom up tax gap measure (paragraphs 2.11, 3.2, 3.8 to 3.11); itervetio yield, as a moitorig measure of compliace ad eforcemet activities (paragraphs 3.3 to 3.7); Maagemet of large busiess Corporatio Tax 7

10 summary viii ix x the total estimated tax uder cosideratio i ope equiries ad its distributio, to demostrate its approach to focusig resources o higher tax risks (paragraphs 2.7 to 2.13); ad the total umber ad the age profile of ope equiries, to demostrate its approach to closig log ruig equiries ad dealig more quickly with ew tax risks (paragraphs 2.4, 2.24 to 2.26). develop ad implemet a traiig programme, i lie with the proposals from Sir David Varey s review, i collaboratio with both large busiesses ad professioal istitutios, to improve the techical capacity ad skills of Departmet tax specialists (paragraphs 4.6 to 4.13); to achieve ad maitai the ecessary complemet of skilled ad experieced staff, develop a Huma Resources pla for Departmet staff workig with large busiesses that (paragraphs 4.4, 4.14 to 4.15): has at least a five year timeframe; outlies Large Busiess Service workforce capability ad requiremets; builds a career path across the Large Busiess Service; cosiders optios for exteral recruitmet; creates a formal metorig scheme; ad liks with the traiig programme. publicise the high risk corporates programme as a example of its approach to dealig with high risk busiesses, ad esure its litigatio strategy is widely uderstood. This would ot ivolve releasig cofidetial iformatio relatig to busiesses (paragraphs 2.31 to 2.32). 8 Maagemet of large busiess Corporatio Tax

11 PART ONE Admiisterig large busiess Corporatio Tax This part provides a overview o how the Departmet maages large busiess Corporatio Tax ad the Corporatio Tax paid. 1.1 Corporatio Tax is a tax o a compay s taxable profits or gais i the Uited Kigdom. The rate is 30 per cet (fallig to 28 per cet from April 2008) for compaies makig profits above 1.5 millio, with lower rates for profits below this threshold. Compaies assess their Corporatio Tax liability after carryig out relevat adjustmets to profits preseted i their accouts ad applyig various reliefs. Sice the itroductio of self-assessmet i , compaies are required to assess their liability, pay ay Corporatio Tax due ad file a Compay Tax retur withi 12 moths of the ed of their accoutig period. 1.2 There are 1.8 millio busiesses i the Uited Kigdom registered to file Compay Tax returs i which they self-assess their liability for Corporatio Tax. Due to the sigificace or complexity of their tax affairs, the Departmet deals with 2,400 of the largest busiesses through its Large Busiess Service. For 400 of these busiesses, the Service deals with all their busiess taxes, icludig Corporatio Tax, PAYE ad VAT. For the remaiig 2,000, the Service deals with oly some of their taxes ad local compliace offices deal with the rest. For example, a large busiess may have sigificat Corporatio Tax liability but a small VAT liability. I this case, the Large Busiess Service would maage the Corporatio Tax ad the local compliace offices would maage the VAT. The Departmet s local compliace offices also deal with all the taxes for small ad medium sized busiesses. I 2006, the Natioal Audit Office ad the Committee of Public Accouts reported o Corporatio Tax: compaies maaged by HM Reveue & Customs Area Offices 1, which are summarised i Appedix 2, alog with the Departmet s respose. 1.3 For the purposes of this report, large busiesses are those dealt with by the Large Busiess Service. Of the 2,400 busiesses, the Large Busiess Service deals with Corporatio Tax for 700 busiesses. I , the Departmet raised 44.3 billio i Corporatio Tax, of which 23.8 billio came from those busiesses withi the Large Busiess Service. 1.4 The curret populatio of large busiesses withi the Large Busiess Service is iherited from the Large Busiess Office ad the Eergy Group of the former Ilad Reveue, ad the Large Busiess Group of the former HM Customs & Excise. These merged i April 2005 o the formatio of HM Reveue & Customs, creatig the Large Busiess Service. The Departmet ackowledges the eed to review membership of the Large Busiess Service ad is curretly developig criteria to decide which busiesses the Large Busiess Service will maage ad those that local compliace offices will maage i the future. 1.5 For each busiess, the Large Busiess Service carries out a structured assessmet of the risks to the paymet of the right Corporatio Tax at the right time. This icludes a review of the busiess s Corporatio Tax positio, trasactios ad its Compay Tax retur. Risks iclude those resultig from geuie mistakes to egliget errors or omissios. The structured assessmet will also iclude tax plaig or avoidace arragemets where the Large Busiess Service s view of the likely tax result differs from that put forward by the busiess. Such issues are ofte a matter of iterpretatio, which ultimately may oly be resolved i the courts. 1.6 I light of these assessmets, the Large Busiess Service udertakes detailed equiries to validate the accuracy ad completeess of some Compay Tax returs. Such equiries may result i additioal tax paymets (or refuds), kow as itervetio yield. Appedix 3 of this report provides additioal iformatio o the risk assessmet ad equiry processes. 1 Corporatio Tax: compaies maaged by HM Reveue & Customs Area Offices, Natioal Audit Office (HC 678, ). Corporatio Tax: Compaies maaged by HM Reveue & Custom s Area Offices, Committee of Public Accouts: Forty-ith Report (HC 967, ). management OF LARGE BuSINESS CORPORATION TAX 9

12 part oe The Departmet s ew approach to maagig large busiess Corporatio Tax 1.7 Sice the merger of Ilad Reveue ad HM Customs & Excise i 2005, the Departmet has reviewed how it delivers services to large busiesses. The Large Busiess Service previously admiistered large busiesses through a regioal office structure. I April 2006, it restructured, movig to a atioally-based office with busiesses grouped ito sectors, each dealig with a specific idustry group such as telecommuicatios ad IT; chemicals, health ad pharmaceuticals; oil ad gas; ad bakig. It also implemeted a ew approach to focusig resources o key risks ad maagig the relatioship with busiesses through the appoitmet of cliet relatioship maagers. 1.8 I November 2006, the former Chairma of HM Reveue & Customs, Sir David Varey, led a review of the relatioship betwee large busiess ad the Departmet. 2 The Govermet cosidered that it ad busiesses have a commo goal i maitaiig ad ehacig the attractiveess of the Uited Kigdom as a place to do busiess. It cosidered that the relatioship betwee the Departmet ad large busiess ad the efficiecy ad effectiveess of the admiistratio of the tax system are importat i achievig this goal. With the acceleratig pace of globalisatio ad ecoomic chage, the Govermet recogised that busiess ad the Departmet eeded a shared perspective ad should egage i ope ad trasparet dialogue. I the review, busiesses fully edorsed the proposals ad recogised that successful delivery would deped o busiesses ad their tax advisers workig with the Departmet i a culture of cooperatio. Appedix 4 of this report summarises Sir David Varey s report ad proposals. 1.9 The Govermet accepted the review s proposals ad the Departmet has placed them at the cetre of its ew approach to maagig large busiess Corporatio Tax. The key proposals i Sir David Varey s report are: a focus o customer relatios ad service; greater certaity over tax due; a efficiet risk-based approach to dealig with tax matters, icludig beefits for busiesses that egage i low risk compliat behaviour; speedy resolutio of issues ad movig to a culture of real time equiries; ad clarity through effective cosultatio ad dialogue I March 2007, the Departmet issued its Approach to compliace risk maagemet for large busiess 3 (see Appedix 4 of this report for further details), i respose to proposals i Sir David Varey s review. Corporatio Tax reveues from large busiesses 1.11 The Departmet raised 23.8 billio i Corporatio Tax from large busiesses i , 54 per cet of all Corporatio Tax raised. Figure 1 shows, i real terms, the total Corporatio Tax raised from large busiesses ad that raised from all other busiesses over the period sice Exteral factors such as ecoomic growth rates, profitability ad iteratioal competitiveess affect Corporatio Tax reveues over time. Over the period to , Corporatio Tax reveues from large busiess raged from 16.4 billio (54 per cet of all Corporatio Tax raised i ) to 24.4 billio (57 per cet of all Corporatio Tax raised i ) i real terms. Corporatio Tax receipts from large busiesses fell i real terms by over 0.5 billio betwee ad The Departmet believes this is largely a result of chages i the ecoomy ad the impact of policy measures The Corporatio Tax raised from the 700 busiesses withi the Large Busiess Service is heavily skewed. For example, fifty busiesses (seve per cet) cotributed 67 per cet of the total Corporatio Tax raised i (Figure 2), a reflectio of the small umber of very large busiesses withi the Large Busiess Service. Aroud 220 busiesses paid o Corporatio Tax i ad a further 210 busiesses each paid less tha 10 millio. The amout of Corporatio Tax paid by idividual busiesses may vary sigificatly year by year, accordig to their idustry ad idividual tradig coditios. 2 Although directly related to the Large Busiess Service customer group, Sir David Varey s report has broader applicatio. The report covers busiesses withi the Europea Uio defiitio of large. That is busiesses with: 250 or more employees, or both a turover of more tha 33 millio ad balace sheet total of 29 millio. Aroud 15,000 busiesses meet these criteria i the Uited Kigdom. The Departmet s Large ad Complex Group i local compliace deals with busiesses which meet these criteria, but which are ot maaged by the Large Busiess Service Maagemet of large busiess Corporatio Tax

13 part oe 1 Corporatio Tax raised from large busiesses ad total Corporatio Tax raised from to , expressed i real terms billios NOTE Total corporatio tax raised from small ad medium busiesses 1 Real terms data, i terms, are derived from HM Treasury Gross Domestic Product deflators Corporatio tax from large busiesses Fiacial Year Source: Natioal Audit Office aalysis of HM Reveue & Customs data 2 The distributio of Corporatio Tax paymets by large busiesses i billios Remaiig busiesses (0%) 50 (7%) 100 (14%) 150 (22%) 200 (29%) 250 (36%) Highest payig busiess raked 1st (% out of the 700 LBS busiesses i brackets) Source: Natioal Audit Office aalysis of HM Reveue & Customs data NOTE 1 Aalysis based o data, the latest available distributio by large busiesses. Maagemet of large busiess Corporatio Tax 11

14 part oe 1.13 Corporatio Tax receipts are also heavily skewed by idustry sector. For example, just three of the 17 idustry sectors i the Large Busiess Service: bakig; oil ad gas; ad isurace raised 67 per cet of all large busiess Corporatio Tax receipts i (Figure 3). These sectors cover 193 (28 per cet) of the 700 busiesses withi the Large Busiess Service but iclude a umber of very large busiesses. Aroud 38 per cet of Corporatio Tax staff i the Large Busiess Service deal with the bakig, oil ad gas, ad isurace sectors. The costs of maagig large busiess Corporatio Tax 1.14 Six hudred staff withi the Large Busiess Service are egaged i maagig large busiess Corporatio Tax, costig 28 millio a year. The Departmet speds a further 2 millio a year o capital ad other operatioal costs. It icurs additioal costs i other specialist Departmetal services, for example, legal services. 3 The distributio of Corporatio Tax raised from the 17 Large Busiess Service sectors billios Bakig Oil & Gas Isurace Utilities Agriculture & Food Chems Health & Pharms Leisure & Media Geeral Retail Telecomms & IT Trasport Costructio Maufacturig Busiess Services Automotive Real Estate Alcohol & Tobacco Public Bodies Sector Source: Natioal Audit Office aalysis of HM Reveue & Customs data NOTES 1 Public Bodies pay o Corporatio Tax but do pay VAT ad employer taxes. 2 Aalysis based o data, the latest available for Idustry Sectors. 12 Maagemet of large busiess Corporatio Tax

15 PART TWO Maagig risks to Corporatio Tax reveues This part examies the Departmet s curret approach to maagig risks to Corporatio Tax reveues ad its plas. 2.1 Large busiesses are ofte multiatioal orgaisatios with complex structures. They form a importat part of the atioal ecoomy i terms of the rage ad amout of taxes they pay, their ivestmet i research ad developmet ad their cotributio to the Uited Kigdom balace of paymets. They are also amog the coutry s largest employers. Large busiesses will assess whether the Uited Kigdom is a competitive ecoomy i which they ca operate. May large busiesses have specialist iteral tax departmets staffed with highly skilled ad experieced idividuals icludig lawyers ad ecoomists, ad may use specialist exteral tax advisers, to operate effective tax plaig ad maagemet. The Departmet s approach to maagig risk 2.2 The Departmet aims to collect the right tax at the right time. I commo with tax authorities worldwide, the Departmet faces a challege i verifyig the accuracy of large busiesses self assessmets of their Corporatio Tax i a eviromet of globalisatio, sophisticated tax plaig ad icreasig complexity of tax legislatio There exists a degree of greyess aroud assessig the right amout of Corporatio Tax, which arises from differet iterpretatios o what is legitimate tax plaig which ca, i tur, create tesios betwee large busiesses ad the Departmet. I cojuctio with the proposals arisig from Sir David Varey s review, the Departmet has developed a ew approach. The aim is to icetivise busiesses to chage their behaviours ad maage their tax affairs i a way that presets a low compliace risk. The approach icludes the followig key features: a) Focusig equiry work o the key risks to tax reveue. b) Speedier resolutio of equiries. c) Tacklig avoidace. d) Workig more collaboratively with large busiesses. 5 2a) Focusig equiry work o the key risks to tax reveue 2.4 I , the Departmet raised additioal Corporatio Tax of early 2.7 billio from its compliace work (kow as itervetio yield paragraph 1.6) (Figure 4 overleaf). At the ed of February 2007, the Large Busiess Service had 4,700 ope Corporatio Tax equiries o the 700 large busiesses. The resources that it commits to each equiry vary cosiderably. They deped, i part, o the availability of staff resources, the amout of Corporatio Tax uder cosideratio, the ature ad complexity of the issues ivolved ad the priority it attaches to each equiry. The umber of ope equiries also varies from busiess to busiess. At February 2007, some busiesses had just oe ope equiry, whilst others had over 220 ope equiries. I part, this reflects the differig size ad complexity of busiesses withi the Large Busiess Service ad the umber of subsidiary compaies, as well as their risk status ad compliace behaviour. The Departmet opeed the majority of these equiries withi the last five years, but some are over a decade old. 4 We have previously examied the complexity of Corporatio Tax legislatio i our report Corporatio Tax: Compaies maaged by HM Reveue & Customs Area Offices (HC ), 13 Jauary 2006, Paragraph (Appedix 2 of this report summarises the reports key fidigs.) 5 management OF LARGE BuSINESS CORPORATION TAX 13

16 part two 2.5 The Departmet imposed pealties o large busiesses for egligece 6 i their Compay Tax returs i 19 cases i , followig completio of equiries ito their returs. The total value of pealties imposed was 15 millio, up from 14 cases with a pealties value of 5 millio i The icreases were due to the Departmet seekig pealties i more cases ad the impositio of two large pealties which icreased the total value imposed. The Departmet ad the busiess may egotiate a settlemet with a agreed collective sum to cover the additioal Corporatio Tax due, iterest o late paymet, a surcharge (a percetage of tax upaid by the due date) ad ay pealty for egligece. If the Departmet ad the busiess do ot reach a egotiated settlemet, the Departmet may proceed to litigatio. There is o statutory basis for the Departmet to impose separate pealties where the completed equiry reveals the busiess has sought to avoid Corporatio Tax. Appedix 3 of this report provides further details o equiries ad the steps the Departmet takes followig completio of equiries. Focusig o high value risks to Corporatio Tax 2.6 The Large Busiess Service has traditioally assiged tax specialists to idividual busiesses. Tax specialists reviewed the busiesses Compay Tax returs ad opeed equiries where they cosidered Corporatio Tax was at risk. The Departmet has foud that, because tax specialists opeed equiries o the majority of idividual risks idetified, it spet collectively sigificat time ad resources o equiries with relatively low amouts of tax uder cosideratio, rather tha cocetratig o examiig higher risk issues ad o busiesses that it cosidered high risk. Show below are the mai factors ivolved i the Departmet s estimatio of a busiess s Corporatio Tax risks. Size, structure ad complexity of the busiess. Tax goverace. 2.7 Figure 5 shows the equiries o large busiesses that tax specialists opeed betwee 2002 ad 2006 ad the Corporatio Tax uder cosideratio i each equiry. A miority of equiries accout for the majority of tax uder cosideratio. Fifty eight per cet of ope equiries ivolve cases where the tax uder cosideratio is less tha 500,000. Collectively, these are likely to amout to less tha oe per cet of the total potetial itervetio yield from all ope equiries. Coversely, oly oe per cet of ope equiries ivolve tax uder cosideratio of more tha 100 millio, but these amout to 43 per cet of the total potetial itervetio yield from all ope equiries. Out of 2,600 equiries the Departmet settled i 2006, 220 (eight per cet) resulted i yields of less tha 5,000 each, icludig 68 equiries of less tha 1,000 each. However this reflects, i part, the Departmet s efforts to settle log ruig equiries (paragraph 2.26). 2.8 Similarly, there has bee o strog relatioship betwee the resources the Departmet commits to each busiess ad the amout of Corporatio Tax uder cosideratio. Figure 6 o page 16 shows the umber of staff days spet i the period April to December 2005 o each busiess agaist the value of Corporatio Tax uder cosideratio for each busiess. This shows there is o clear relatioship or focus of resources o busiesses with higher amouts of tax uder cosideratio. 4 billios The itervetio yield from equiry work, show i actual values for each year Fiacial arragemets. 1.0 Avoidace schemes. Stregth of uderlyig systems. Legal complexity ad challeges. Cooperatio with the Departmet. Appedix 3 of this report further outlies how the cliet relatioship maager ad tax specialists carry out a structured assessmet of a busiess s Corporatio Tax risks Source: Natioal Audit Office aalysis of HM Reveue & Customs data NOTE Fiacial year The Departmet couts yield i the year that it is fialised, ot the tax year to which the equiry relates. 6 Negligece may occur where the busiess has ot give sufficiet supervisio of a system, or staff, resultig i reportig errors o the completed tax retur. 14 Maagemet of large busiess corporatio tax

17 part two 5 (a) the distributio of ope equiries by value bad ad (b) the amout of Corporatio Tax uder cosideratio by value bad (Jauary 2007) a) Percetage of all ope equiries to <500k 8 500k to <1m 9 9 1m to <2m 2m to <5m 6 5 5m to <10m 10m to <25m m to <50m 50m to <100m 100m+ Equiry value categories b) Percetage of all tax at risk <1 1 0 to <500k 500k to <1m 2 1m to <2m 5 7 2m to <5m 5m to <10m 14 10m to <25m 12 25m to <50m 15 50m to <100m 100m+ Source: Natioal Audit Office aalysis of HM Reveue & Customs data Equiry value categories Maagemet of large busiess corporatio tax 15

18 part two 2.9 I April 2006, the Departmet implemeted a ew approach across all taxes kow as Resourcig to Risk. This places a emphasis o estimatig the maximum amout of tax uder cosideratio ad the cocetratig resources to tackle the highest value, most sigificat risks first, ad to esure quicker resolutio of major equiries. This should eable it to differetiate its approach to low risk ad high-risk busiesses ad thereby implemet a importat part of Sir David Varey s proposals. Busiesses idetified as low risk ca expect to receive a light touch i terms of compliace activity. The Departmet will target its compliace resources o those busiesses it has desigated as high risk. Its log term strategy is to ecourage busiesses to chage their behaviour ad to reduce their risk ratig volutarily Uder the ew approach, the Departmet estimates the maximum Corporatio Tax uder cosideratio i each busiess agaist stadard defied risk categories (paragraph 2.6), which it the shares with the busiess to gai its views. The tax specialists are required to eter all estimates oto the maagemet iformatio system kow as the core system ad the carry out equiries o the highest estimates of Corporatio Tax uder cosideratio The Departmet extracted a sapshot of data from the core system i February This showed a total of 8.5 billio uder cosideratio for all tax issues up to 12 moths old, where tax specialists had cocers whether large busiesses had correctly self assessed their Corporatio Tax. This figure may overestimate the tax actually at risk, or collectable, as whe staff make a iitial estimate they do ot yet have access to full iformatio about the busiess. Makig a estimate of the Corporatio Tax uder cosideratio requires a good uderstadig of the tax legislatio, the idustry sector ad the idividual busiess Oce the equiry is completed, the Large Busiess Service reviews the amout of Corporatio Tax agreed i settlemet agaist the origial estimatio. This provides a opportuity to moitor the accuracy of iitial estimates ad to idetify where staff skills ad experiece may eed to develop i estimatig tax risks more precisely At the ed of 2006, the Large Busiess Service coducted a quality assurace review of the core system six moths after its itroductio. It foud that some risks ad ope equiries were missig from the core system ad that some staff had ot accurately recorded their 6 There has bee o strog relatioship betwee staff resources deployed o each busiess ad the amout of Corporatio Tax uder cosideratio for the busiess (April to December 2005) Staff days Lie of best fit Corporatio Tax at risk billios Source: Natioal Audit Office aalysis of HM Reveue & Customs data NOTES 1 The figure shows the lie of best fit. The R 2 is 0.42, idicatig that there is ot a strog relatioship betwee the Corporatio Tax uder cosideratio o a busiess ad the umber of staff days deployed o the busiess. 2 The Departmet had more tha 0.5 billio of Corporatio Tax uder cosideratio i a further seve cases. To show the dispersal of the majority of poits more clearly, these cases are excluded from the above aalysis, but do ot affect the R 2 show. 3 The data cover the allocatio of staff days i the first ie moths of Maagemet of large busiess corporatio tax

19 part two time spet workig o idividual equiries. Accurate recordig is importat i esurig that the Departmet is focusig resources o equiries with higher amouts of Corporatio Tax uder cosideratio. The Pacesetter programme (paragraph 2.37) provides a opportuity to explai the value of the core system to all staff withi the Large Busiess Service. Iteratioal experiece 2.14 Other tax authorities face similar issues i developig ad refiig their methods of risk assessmet. The Australia Taxatio Office cosiders that effective tax rates provide oe useful measure of tax compliace over time, particularly for large ad medium sized busiesses, which helps it to compare ad cotrast the tax positio of compaies. The effective Corporatio Tax rate of a busiess is its Corporatio Tax liability declared as a percetage of pre-tax compay profit, which is the compared to the statutory Corporatio Tax rate. However, the Australia Taxatio Office s approach also takes ito cosideratio factors that ca legitimately reduce a busiess s effective tax rate. For example, tax losses, compay profits, capital gais, frakig credits ad foreig tax credits, as well as other idustry based tax cocessios The Australia Taxatio Office uses effective Corporatio Tax rates alogside other ratios ad qualitative risk filters to assess risk. 7 The effective Corporatio Tax rate ratios are: Compay Tax: gross reveue or total icome. Compay Tax: operatig profit. Compay Tax: taxable icome. Compay Tax: total or et assets (although asset valuatios may be problematic) It also emphasises that, while effective tax rates may help it idetify busiesses that have tax risks, it is still importat to have a good uderstadig of the busiess, its idustry, its profit drivers ad its tax plaig for major trasactios The Caadia Reveue Agecy is also shiftig its focus towards usig effective tax rates ad has adopted the approach of the Australia Taxatio Office. It is usig effective tax rates to assist i differetiatig betwee high ad low risk busiesses, which will reduce the eed for tax specialists to udertake detailed risk assessmets for each idividual busiess. It aims to have very little iteractio with busiesses it classifies as low risk The Large Busiess Service uses ratios such as effective tax rates i udertakig idustry aalysis. It has ot adopted effective tax rates to the same degree as the Australia Taxatio Office ad Caadia Reveue Agecy as it cosiders there are particular difficulties i extractig effective tax rate iformatio from accouts that combie Uited Kigdom ad foreig tax ad profits. The experiece of large busiesses 2.19 Our cosultatio with large busiesses i early 2007 idicated they had high expectatios from the Departmet s ew approach of focusig resources o higher values of Corporatio Tax uder cosideratio. But some busiesses reported that they had yet to experiece the ew approach ad expressed frustratio at the cotiued umber of low value equiries ad additioal work ivolved i respodig to questios o a large umber of equiries. I November 2006, a iteral review by the Large Busiess Service also foud that its tax specialists were cotiuig to work o low value equiries: risk workig is a problem i may tax specialists mids. They fid it hard to walk away from issues eve whe they believe o beefit will accrue Some large busiesses also reported that the Large Busiess Service staff ope a sigificat umber of equiries, without the havig sufficiet resources to progress them. This is a result of traiig that has ecouraged staff to ope equiries where they see ay Corporatio Tax at risk. A high umber of ope equiries spreads staff resources more thily, riskig delays i cocludig each equiry, which ca exted the ucertaity for busiess i settlig their tax affairs. The busiesses cosulted cosidered that tax specialists ask a large umber of questios to gather iformatio to spot ay amouts of Corporatio Tax at risk, rather tha focusig o higher amouts. The Departmet cosiders that this approach may be ecessary whe the busiess has ot set out its tax affairs i a straightforward or trasparet way. The busiesses we cosulted were kee to see the Large Busiess Service prioritise ad focus staff resources o high value equiries, progressig them swiftly. This would provide beefits to both the Departmet ad low risk busiesses ad demostrate to all busiesses ad their tax advisers the beefits from trasparecy i tax affairs. 7 The Australia Taxatio Office publishes these ratios i its Large Busiess ad Tax Compliace booklet, dowloads/77898_n _w.pdf. Maagemet of large busiess corporatio tax 17

20 part two Settig a materiality limit 2.21 The Departmet s ability to shift staff resources to higher risk equiries is depedet o providig tax specialists with clarity over what is low risk. I May 2007, the Departmet issued ew guidace to defie lower risks ad how these should be maaged. It has developed priority risk scores to assig risk levels that reflect the size ad impact of the risk ad a probability factor. For curret equiries that have a low priority risk score, the Departmet guidace is that tax specialists should examie critically the reasos for pursuig these. Valid reasos iclude: clear errors that could be settled with a telephoe call, letter or meetig; madatory work, for example, where Departmet procedures require examiatio; ad risks where there are potetial wider cosequeces which must be addressed The Departmet s previous guidace o materiality caused cofusio amog tax specialists, as it stated there was o moetary limit below which staff should ot examie risk. This gave staff the impressio that it was acceptable to ope equiries wheever Corporatio Tax was at risk. Our cosultatios with Departmet staff cofirmed their cofusio o this poit, with some tax specialists reluctat to drop low value equiries, as they believed all tax uder cosideratio deserves ivestigatio Large busiesses cosider that the itroductio of improved materiality guidelies would focus Departmetal resources o a smaller umber of higher value cases, which it could the maage more effectively ad speedily. Similarly, busiesses should also beefit from reduced demads o their ow tax departmet staff. I May 2007, the Departmet released ew guidace o materiality, outliig the criteria a idetified risk should meet before a equiry ca progress. 2b) Speedier resolutio of equiries 2.24 The Departmet is seekig to achieve speedier resolutio of equiries to address a key elemet of Sir David Varey s proposals. The target is to complete equiries withi 18 moths. Seior maagemet will become resposible for the active maagemet ad resolutio of tax equiries that remai usettled after 18 moths of equiry. At Jauary 2007, 49 per cet of all ope equiries were over two years old with 13 per cet over four years old. The reasos iclude isufficiet resources or skills withi the Departmet to progress the equiry, difficulties i obtaiig iformatio from the busiess ad delays resultig from litigatio Prologed equiries prevet busiesses from gaiig certaity about their Corporatio Tax positio, require busiesses to cotiue to put resources ito respodig to requests for iformatio ad ca hider the workig relatios betwee the two sides. For the Departmet, dealig with old equiries is more complex as iformatio is more difficult to obtai, the busiesses tax staff may chage, recollectio of old evets ca be ucertai ad the equiries relate to tax periods where the legislatio may have subsequetly chaged. Cotiuig to examie old equiries spreads staff resources more thily ad restricts the Departmet s capacity to help busiesses reduce their overall risk ratig ad to help them resolve issues as they occur, before they complete their tax returs, which is kow as real time workig For these reasos, the Departmet is prioritisig clearig its backlog of old equiries. By 31 March 2007, it had closed over half of the equiries that were five years old or more at 1 April 2006 (Figure 7). Clearig old equiries may ivolve proceedig to litigatio o complex issues or, where low amouts of Corporatio Tax are at risk, settlig with the busiess. 7 Progress i closig old equiries betwee April 2006 ad March 2007 Equiries opeed i accoutig periods i 2001 ad earlier Equiries opeed i accoutig period 2002 Total Equiries ope at 1 April ,115 1,313 3,428 Equiries still ope at 31 March , ,681 Equiries settled by 31 March ,090 (51%) 657 (50%) 1,747 (51%) Source: Natioal Audit Office aalysis of HM Reveue & Customs data 18 Maagemet of large busiess corporatio tax

21 part two 2c) The Departmet s work to tackle Corporatio Tax avoidace 2.27 Busiesses have the right to pla their affairs efficietly to miimise their tax liabilities withi the rules ad thereby maitai their competitive positio compared to other busiesses. Busiesses ca legally make plas to achieve this ad take up tax icetives the Govermet provides. However, the Departmet is kee to reduce the amout of tax lost to the Exchequer through tax avoidace. Tax avoidace is ot easily defiable but it ca ivolve highly creative ways of usig tax laws to reduce or defer tax. Iterpretatios of tax legislatio ca differ so that busiesses may regard their actios as acceptable, whilst the Departmet may regard them as i coflict with the rules or the itetio of the legislatio. Ultimately, it is for the courts to decide o the legality of the arragemets. Busiesses ofte seek help from their tax advisers, such as accoutig ad law firms ad ivestmet baks, i arragig their tax affairs to miimise their tax liabilities. These advisers may also develop schemes for their cliets to reduce Corporatio Tax I August 2006, the Govermet exteded legislatio to improve the trasparecy of busiesses tax arragemets ad reduce the use ad effectiveess of direct tax avoidace schemes by requirig their disclosure. This allows the Departmet to take swifter ad more targeted actio to couter deliberate abuse of the tax system (see Appedix 5 of this report for further details). The legislatio requires the promoter of the scheme to disclose it to the Departmet ad the user to declare the use of a scheme o its Compay Tax retur. This eables the Departmet to assess what actio it eeds to take to protect Corporatio Tax reveues, for example, by recommedig to Miisters legislatio to close the scheme promptly. The Case Example i Figure 8 illustrates how the Govermet used legislatio to close a avoidace scheme kow as divided strippig Figure 9 overleaf shows that the umber of schemes disclosed to the Departmet has levelled out followig a iitial peak i disclosures betwee July ad December At the ed of February 2007, the Departmet had received early 900 disclosures of avoidace schemes coverig Corporatio Tax ad other direct taxes. The Govermet had closed 350 schemes (almost 40 per cet) by targeted legislatio. O the remaider, the Departmet cosiders existig legislatio sufficiet to prevet users of the scheme avoidig Corporatio Tax Sice the itroductio of the legislatio, the Departmet has idetified a move from geeric avoidace schemes to more bespoke schemes that are ofte specifically desiged to cover large oe off trasactios or for compaies with specific busiess structures. As oe type of scheme becomes less prevalet, other types icrease, demostratig the dyamic eviromet i which both the Departmet ad busiesses work The Departmet is also tacklig avoidace through its high risk corporates programme, i which seior officials i the Departmet work directly with the maagemet boards of busiesses presetig the highest tax risks. The Departmet aims to ifluece the behaviours of these busiesses by sedig a message to their boards that it will give higher risk busiesses its full attetio. As this programme requires the Departmet to ivest itesive resources, it has limited the actio to a very small umber of busiesses at ay oe time. However, collectively these busiesses have several billio pouds of tax uder cosideratio. By May 2007, the Departmet had resolved sigificat tax issues, secured cosiderable additioal tax ad received commitmets from the busiesses affected to chage their relatioship with the Departmet. These iclude commitmets to material chages i tax plaig policies i future years. The Departmet has released little iformatio publicly about the programme. 8 A example of a avoidace scheme quickly closed by the Govermet The Govermet ca close disclosed schemes quickly to prevet busiesses avoidig Corporatio Tax. I Jauary 2005, the Paymaster Geeral aouced i Parliamet that the Govermet proposed to repeal a sectio of legislatio, with immediate effect, to prevet the use of curret legislatio for a divided strippig avoidace scheme. The aoucemet effectively closed the scheme withi three weeks of it beig disclosed to the Departmet, esurig the protectio of a estimated 1 billio Corporatio Tax. The divided strippig scheme ivolved a fiacial trader acquirig the rights to receive a divided that has bee declared but ot yet paid. The trader does ot acquire the shares o which the divided is to be paid the divided is stripped from the share. The trader claims a deductio i its tax retur for the cost of the rights to the divided. Shortly afterwards the trader disposes of the rights for a amout similar to the amout paid. The trader claims that the receipt is ot chargeable to tax. The commercial result is effectively il, as the right is bought ad sold for a similar amout. However, the trader obtais a tax loss equal to the amout paid to acquire the divided. All the moey remais withi the group of compaies of which the fiacial trader is part. A umber of special purpose compaies have to be created for the scheme to work. Source: HM Reveue & Customs Maagemet of large busiess corporatio tax 19

22 part two 2.32 The Departmet has also developed a litigatio ad settlemet strategy that aims to chage the behaviours of busiesses ad the culture of the Departmet. Prior to this strategy, the Departmet might settle a equiry by acceptig a sum below the amout of Corporatio Tax uder cosideratio, eve whe it cosidered it had a strog case for a higher settlemet value. This teded to ecourage busiesses to egage i riskier tax strategies. Uder the ew strategy, if the Departmet believes it has a strog legal case it strives to obtai 100 per cet of the Corporatio Tax uder cosideratio. If ecessary, this may mea proceedig to litigatio. Coversely, if the Departmet cosiders its chaces of success to be less tha 50 per cet it will ot pursue legal actio uless the particular circumstaces justify it. The strategy aims to provide a cosistet approach towards all busiesses ad to promote the message that where the Departmet is deployig strog argumets agaist avoidace schemes, it will ot settle for less tha all the Corporatio Tax uder cosideratio. The primary purpose of the strategy is to shift the log-term behaviour of busiesses. However, i our cosultatio with busiesses, they expressed cofusio over the litigatio strategy. They perceived that the Departmet litigated i all cases ad they cosidered this ra couter to the ew approach of buildig trustig relatioships. To clarify its positio, i Jue 2007, the Departmet published its strategy o its website ad through the Tax Joural. 2d) Workig more collaboratively with large busiesses ad their tax advisers 2.33 Oe of the key drivers of Sir David Varey s review was improvig the relatioship betwee large busiesses ad the Departmet. The Departmet had previously recogised this eed. I April 2006 it developed i cosultatio with large busiesses a operatig model for the Large Busiess Service. The operatig model focused o: helpig busiesses comply with Corporatio Tax; buildig a good relatioship, through appoitig for each busiess a cliet relatioship maager, whose primary role is to help the busiess meet its tax obligatios; improvig its uderstadig of large busiesses ad the factors that drive their commercial behaviour; targetig its activities o high risks ad those busiesses which do ot fulfil their tax obligatios, to protect Corporatio Tax reveues; ad maagig large busiesses i idustry sectors. 9 The umber of avoidace schemes from July 2004 to July 2006 Notificatios Q Q Q Q Q Q Q Q Q2 Source: Natioal Audit Office aalysis of HM Reveue & Customs data NOTE Quarter 2 icludes data for August ad September oly Quarter 2 icludes data for July oly. 20 Maagemet of large busiess corporatio tax

23 part two 2.34 At the heart of the operatig model is the appoitmet of 150 cliet relatioship maagers across the 17 idustry sectors. A cliet relatioship maager is assiged to each busiess. The cliet relatioship maagers are resposible for discussig how they assess ad maage the risks that apply to the busiess, ad help the busiess uderstad what they see as the key risks. The cliet relatioship maager is also expected to uderstad the relatioship betwee the busiess ad ay exteral tax advisers, icludig accoutats ad lawyers, ad the role of these advisers i the tax fuctio of the busiess. The Departmet cosiders the cliet relatioship maager role pivotal i improvig the relatioship ad its uderstadig of the eeds of large busiess A busiess s tax advisers are a key ifluece o its behaviour ad compliace with tax legislatio. The Departmet also has a strategy to improve services for tax advisers to help them support their large busiess cliets more effectively i complyig with tax legislatio. It aims to work more collaboratively with tax advisers to help reduce the tax risks their cliet busiesses preset. The Departmet, large busiesses ad tax advisers see this as importat i achievig the proposals i Sir David Varey s review I September 2006, the Orgaisatio for Ecoomic Cooperatio ad Developmet aouced a study ito tax advisers (or tax itermediaries). This icludes examiig the impact tax itermediaries have o tax compliace by their cliets. It is also examiig the factors that ifluece the behaviour of tax itermediaries ad shape their relatioship with their cliets ad reveue departmets. The study is expected to report i November 2007 ad icludes members of the Departmet o the study team I implemetig the operatig model ad Sir David Varey s proposals, the Departmet has also recogised the eed to chage the attitudes ad behaviours of its staff to achieve the desired culture of cooperatio with large busiess. As a first step, the Large Busiess Service is ruig staff egagemet evets, usig the tools ad techiques developed more widely uder the Departmet s chage programme kow as Pacesetter. The first evets have focused o esurig seior staff with a leadership or maagemet role uderstad, accept ad ca apply the ew approach. The Large Busiess Service is ow extedig these evets to cover some frotlie staff such as cliet relatioship maagers ad tax specialists To achieve the desired relatioship, it is essetial for frotlie staff to uderstad fully ad implemet the ew approach successfully. They represet the Large Busiess Service each day i its commuicatios with large busiesses. The Departmet ackowledges more work is required to embed the ew approach fully. I November 2006, its review of a sample of Large Busiess Service staff revealed that ot all had embraced the priciples of the ew approach ad that 67 per cet of cliet relatioship maagers ad tax specialist maagers observed the eed to chage the operatig culture. The review cocluded that staff remai i their comfort zoes, carryig out familiar tasks i familiar ways I our cosultatio with large busiesses, they expressed support for Sir David Varey s proposals ad the operatig model ad welcomed the Large Busiess Service s more collaborative approach, which they cosidered a move towards best practice. They cosidered that the ew cliet relatioship maager role could provide a sigle poit of cotact ad help develop positive relatioships ad a detailed kowledge of the busiess. But some reported that they had ot experieced the more ope ad trustig relatioships the Departmet was advocatig ad that the old eforcemet culture still existed. This idicates the potetial value of extedig the Pacesetter programme to frotlie staff hadlig large busiess taxes. Joit workig across the Departmet 2.40 The Large Busiess Service calls o other parts of the Departmet i maagig large busiess Corporatio Tax, such as advice from legal services. These fuctios have to balace requests from the Large Busiess Service agaist those from other uits. To achieve the Departmet s ew approach to maagig large busiess Corporatio Tax, it must take a coordiated approach across its idividual fuctios. The Large Busiess Service eeds to work joitly with other parts of the Departmet to match priorities ad resource capacities to avoid bottleecks ad prevet duplicatio i requests The large busiesses we cosulted cosidered that the role of the cliet relatioship maager improved the maagemet of equiries withi the Large Busiess Service. However, some busiesses reported that whe their cliet relatioship maager forwarded equiries to other parts of the Departmet, they received limited iformatio o the expected timetable for the progress of the equiry. 8 Orgaisatio for Ecoomic Co-operatio ad Developmet: Tax Itermediaries Project. Terms of Referece Maagemet of large busiess corporatio tax 21

24 part two 2.42 I November 2006, a survey by the Large Busiess Service of a sample of cliet relatioship maagers ad busiess teams showed that 90 per cet of respodets experieced problems i receivig advice from other parts of the Departmet i the agreed time. They cosidered that the mai reasos for delays were iadequate resources, competig priorities, complexity of the issues ad delays i assessig the impact ay decisio would have o other busiesses. Tax specialists reported similar experieces: oly 34 per cet received iformatio from other parts of the Departmet o time I December 2006, the Departmet published guidace o the roles ad resposibilities of cliet relatioship maagers ad sector leaders, icludig their role i cosultig techical specialists across the Departmet ad the approach to settlemet ad litigatio of issues. 9 This aimed to help large busiesses uderstad whe the settlemet of a equiry was outside the cliet relatioship maager s authority. Sir David Varey s review icluded a proposal to resolve issues withi set timeframes. This gives the whole Departmet a target ad collective objective to provide advice o time ad a impetus to ehace joit workig ad cooperatio across differet areas of the Departmet, ad to match resources ad priorities i maagig large busiess Corporatio Tax I our ow cosultatio with Large Busiess Service cliet relatioship maagers ad tax specialists, they also expressed difficulties i coordiatig work with the Departmet s local compliace offices. The Departmet s survey foud that 40 per cet of cliet relatioship maagers ad 56 per cet of tax specialists reported difficulties i workig with local compliace offices, particularly whe the Large Busiess Service maaged oly some of a busiess s taxes ad a local compliace office maaged the remaider. These icluded a lack of commuicatios from local offices about their activities; a lack of awareess withi local offices o the role of the cliet relatioship maager ad the operatig model ad iadequate collaboratio betwee the Large Busiess Service ad local offices. As a result, busiesses experieced a disjoited approach betwee the Large Busiess Service ad local offices. To overcome these difficulties, the Departmet is cosiderig ew arragemets so that the Large Busiess Service would deal with the etire tax affairs of a smaller umber of large busiesses Maagemet of large busiess corporatio tax

25 PART THREE Measurig ad maagig performace This part examies how the Departmet curretly measures its performace ad potetial measures for the future. Departmetal targets 3.1 The Departmet aims to reduce the level of o-compliace ad miimise the burde o compliat busiesses. For 2005 to 2008, the Departmet has a Public Service Agreemet target to reduce by 3.5 billio, by March 2008, the aual uder-paymet across direct tax ad Natioal Isurace cotributios. It has 25 iteral milestoes that cotribute to this, icludig oe that relates to the Large Busiess Service from the Departmet s 2004 Sped to Raise package, which is to icrease the total itervetio yield by 843 millio (takig as the baselie). I , the Departmet reported a additioal itervetio yield of 730 millio agaist a iteral milestoe for that year of 821 millio. However, the Departmet has met the cumulative milestoe of 1.4 billio over the three year Sped to Raise period. A sigificat proportio of the additioal itervetio yield arises from a small umber of large settlemets. The dates o which large cases are settled may make a sigificat impact o the total itervetio yield for ay year ad makes precise forecastig difficult. The Large Busiess Service is also cotributig towards the Public Service Agreemet target to reduce uderpaymets through wider legislative chages ad cotrols The Departmet is curretly formulatig its targets for ad beyod with HM Treasury ad is cosiderig broader targets to capture the full extet of its work to improve compliace ad quality of service. Sir David Varey s review proposed the Departmet itroduces structured ways to get hoest feedback from busiesses o their relatioship with it ad how it could be improved. The Departmet is puttig i place customer surveys to evaluate qualitative aspects of its performace. Itervetio yield 3.3 The additioal tax (itervetio yield) resultig from the Departmet s compliace activities curretly provides the oly readily measurable elemet of performace. Itervetio yield comprises three mai elemets: Direct yield additioal moies or tax liabilities idetified for curret ad previous years with adjustmets for cosequetial effects i the followig two years. Accelerated liabilities additioal moies obtaied from timig adjustmets that are excluded from direct yield (as a example, a tax charge may be brought forward oe year). Pre-retur work work with the taxpayer, udertake prior to the submissio of their retur, which geerates additioal moies due to improved compliace (although this is difficult to measure). Of the three types, direct yield cotributed over three quarters of the itervetio yield achieved i (Figure 10). 10 Additioal yield raised by the Large Busiess Service s compliace activities i m % of total Direct yield 2, Accelerated yield Pre-retur work Total 2, Source: Natioal Audit Office aalysis of HM Reveue & Customs data 10 The Natioal Audit Office is udertakig a examiatio of the data systems the Departmet uses to moitor ad report o progress agaist its Public Service Agreemet targets for ad will report towards the ed of management OF LARGE BuSINESS CORPORATION TAX 23

26 part three 3.4 The Departmet has used itervetio yield as the primary Corporatio Tax compliace measure sice It uses it to uderstad the impact of its eforcemet activity. As the Departmet shifts its focus o to real time ad pre-retur work ad o to helpig ad supportig busiesses comply, the traditioal measure of itervetio yield becomes less meaigful as it will ot reflect the wider rage of activities the Departmet carries out to improve compliace. For example, cliet relatioship maagers ad seior maagemet put sigificat effort ito liaisig with large busiesses, uderstadig how they operate, ad supportig compliace, the effects of which are ot fully captured i itervetio yield. 3.5 A small umber of large paymets ca potetially divert attetio away from the effectiveess of compliace activities across the whole populatio. To illustrate the impact of major settlemets, i 2006 the Large Busiess Service settled eight cases that secured 26 per cet of its total yield for that year. The largest idividual paymet was 234 millio. 3.6 A cotiuig focus o itervetio yield may affect the Departmet s ability to shift the culture ad behaviours of staff. Itervetio yield targets ca ecourage tax specialists to work o lower value equiries that may be simpler, more easily resolved ad which provide greater certaity. This may ru couter to the Departmet s objective of focusig resources o the highest value tax risks, with potetially higher value settlemets, but which offer less certaity to the Departmet o the outcome of the equiry or timig of settlemet. 3.7 The Caadia Reveue Agecy ad the Uited States Iteral Reveue Service have also idetified limitatios i the use of itervetio yield as a compliace measure, although they recogise it as a useful moitorig tool. The Iteral Reveue Service is curretly triallig the use of pre-retur assessmets. This approach should icrease busiesses overall compliace i the tax returs they submit, reduce the eed for post retur eforcemet work ad thereby reduce reported yield. Cosequetly, the Iteral Reveue Service is iterested i idetifyig measures that could assist i capturig the overall compliace picture. The Corporatio Tax gap 3.8 The Corporatio Tax gap is the differece betwee the amout the Departmet collects through routie compliace ad the total theoretical liability if all taxpayers were fully compliat with Corporatio Tax legislatio. I theory, the Corporatio Tax gap is the optimal measure for gaugig the Departmet s performace i maagig large busiess Corporatio Tax compliace over time. However, there are sigificat challeges i developig a estimate of the gap icludig lack of idepedet ecoomic data ad difficulties i estimatig the extet of iteratioal tax plaig ad avoidace. 3.9 There is limited iteratioal experiece i usig a Corporatio Tax gap to measure the performace of reveue departmets. The Uited States Iteral Reveue Service tracks progress made agaist a direct tax gap, but focuses o the tax gap attributable to idividuals rather tha busiesses, as it cosiders this accouts for the majority of its overall gap Over time, the Departmet has udertake some work o estimatig the Corporatio Tax gap. I 2005, it brought together a rage of data, icludig risk assessmets of large busiesses ad surveys ad attempted to estimate the gap. The Departmet cocluded that the results were ot sufficietly robust to be of use ad it has ot repeated the exercise. However, it has carried out some backgroud work to improve the data sources used i the exercise. The Departmet uses tax gap measures for idirect taxes, such as VAT ad tobacco ad alcohol excise duties ad has a extesive research programme to improve their reliability ad accuracy The Departmet s ew maagemet iformatio system for recordig estimates of maximum tax uder cosideratio (the core system ) provides a opportuity to develop a overall compliace measure. The Departmet could moitor the total value of estimates of maximum Corporatio Tax uder cosideratio to geerate a broad upper boudary of possible o-compliace. Clearly, the estimate of maximum tax uder cosideratio would eed to be regarded with cautio, as it is made subjectively by idividual tax specialists without full kowledge of the busiess ad its circumstaces. However, as the quality of the data i the core system improves over time, the Departmet will be able to use it to determie the tred i compliace across the large busiess populatio. 24 Maagemet of large busiess corporatio tax

27 PART FOuR Departmetal staff skills ad resourcig This part examies the staff skills ad resources required to work effectively with large busiesses. 4.1 The largest busiesses the Departmet deals with are complex, sophisticated ad dyamic, requirig the Departmet s staff to have extesive skills, kowledge ad idustry awareess to maage their Corporatio Tax. To perform effectively, the Departmet eeds to: achieve staff cotiuity; build staff idustry kowledge; provide appropriate high quality traiig; ad promote staff career progressio. Staff cotiuity plaig 4.2 Aroud 140 (a quarter) staff i the Large Busiess Service who deal with large busiess Corporatio Tax are due to retire over the ext 10 years. Although this umber is ot uusually high, the Large Busiess Service staff we cosulted expressed cocer over the resultig loss of idustry kowledge, experiece ad cotacts. They cosidered this was the key risk to the Large Busiess Service s ability to meet its objectives. I our cosultatio with large busiesses, they also cosidered that the staff of the Large Busiess Service with the greatest experiece ad those they respected as idustry experts, teded to be those approachig retiremet. 4.3 The Departmet has filled vacacies that arise withi the Large Busiess Service through recruitig tax specialists from other parts of the Departmet, maily from local offices that deal with busiess taxes. Durig 2006, 30 tax specialists from local offices trasferred to the Large Busiess Service to fill vacacies. Local office staff have cocers over the outflow of skilled people, may of whom are at higher grades. However, such actio also idicates the Departmet s commitmet to deployig resources to high risks ad esurig the best value, i terms of compliace, is achieved from its pool of tax specialist resource. 4.4 The Departmet does ot have a coordiated log-term strategy for staff cotiuity ad recruitmet of tax specialists ito its large busiess work other tha through iteral trasfer. I our cosultatios with staff ad busiesses, participats cosidered exteral recruitmet ito the Large Busiess Service would improve the skill base, brig i relevat ad up to date kowledge of idustry ad assist i trasformig the culture to meet the priciples of the operatig model. Although there are challeges i exteral recruitmet at the same time as the Departmet is reducig its overall umber of staff, the Departmet has recetly recruited 17 staff from the tax professio i the private sector to work o direct taxes. 4.5 As part of a expasio i its work ad icreased fudig, the Large ad Medium Sized Busiess Sectio of the Uited States Iteral Reveue Service is egaged i a large-scale recruitmet drive for 900 staff over 12 moths (there are 6,000 people withi the Sectio). Exteral appoitmets accout for half the ew recruits. The Sectio idicated that, i the past, it had bee successful at recruitig private tax specialists, who were prepared to move to the public sector for lifestyle reasos. The drive to recruit exterally had trasformed the Sectio, as the exteral recruits had bee istrumetal i acceleratig the maagemet s chage process ad brought with them valued skills ad kowledge. Some staff may be employed for oly short periods. management OF LARGE BuSINESS CORPORATION TAX 25