HMRC Consultation: Large Business compliance enhancing our risk assessment approach Response by the Chartered Institute of Taxation 1 Introduction 1.1 This consultation document is examining how HM Revenue and Customs (HMRC) Business Risk Review (BRR) approach can be improved in order to continue to support a shift in large business tax compliance behaviours and provide greater clarity and confidence for large businesses. 1.2 The BRR is a central feature of how HMRC manage the tax compliance of the largest businesses in the UK. The current process has undergone limited change since its introduction 10 years ago. Most businesses with a turnover of more than 200m are managed by HMRC s Large Business Directorate, which allocates a Customer Relationship Manager (CRM) for each business it manages. 1.3 The CRMs currently conduct a periodic BRR of each large business, assessing their risk profile and placing them into a binary Low Risk/non-Low Risk category. This assessment determines the level of scrutiny and resource the business receives from HMRC. 1.4 The consultation is exploring whether the BRR model can be refreshed, potentially with more risk categories tailored to the tax risks encountered in the large business population, for example, the BRR could place businesses into either a low risk, lowmoderate risk, high-moderate risk, high risk or significant risk category. It considers that a more granular risk classification will help HMRC focus resource on the highest risk businesses, and increase the behavioural influence of the BRR process within businesses generally. 1.5 In line with our stated objectives for the tax system, the Chartered Institute of Taxation (CIOT) believes that the BRR process should aim to be providing large businesses with greater certainty, so they can plan ahead with confidence. 1.6 As an educational charity, our primary purpose is to promote education in taxation. One of the key aims of the CIOT is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. Our comments and
recommendations on tax issues are made solely in order to achieve this aim; we are a non-party-political organisation. 2 Executive summary 2.1 The CIOT agrees that the BRR is an important part of the way HMRC deliver their Large Business Strategy. However, problems can arise when the process is not applied properly in practice. The design can be modified; ensuring that CRMs operate it correctly is more urgent. 2.2 It clearly makes sense for HMRC to profile large businesses at the whole-of-business level as well as risk assessing particular tax returns. So the BRR underpins resourcing to risk, ensuring HMRC direct resources where they will get the best return. 2.3 The BRR should provide HMRC with a better understanding of a business s commercial objectives, business processes and appetite for tax risk. It should provide the business with a clear view of where the business lies by reference to different aspects of compliance with its tax obligations and HMRC s concerns in each area. Best practice is that HMRC should actively help and businesses should actively manage this so that it provides a framework for the ongoing relationship between the business and HMRC. 2.4 The frequency of BRRs should be for HMRC to decide. However, it makes sense to do reviews less frequently where a business is judged to be lower risk and to be able to do them only for tax regimes that are thought to be higher risk where the risk may vary between taxes within a business. 2.5 Using the BRR to encourage businesses to move down the risk spectrum is a sensible approach. Having more differentiation in markings can help with this, as long as it does not divert resources into arguments about borderline cases. It does need to be recognised, though, that large businesses are generally inherently complex, and for this reason there may be relatively few businesses that can truly ever be in the lowest band of risk. 2.6 HMRC need to ensure that they do not give adverse incentives. Becoming low risk has sometimes led to HMRC ceasing to pay attention to businesses. This can damage a business which needs an answer to a complex question commercially when the answer cannot be delivered in a timely manner. Fear of this may drive some businesses to ensure they do not become low risk in the current ranking system. The best way to overcome this would be to ensure the BRR discussion covers the resources HMRC and the business agree need to be allocated to support and monitor the business s tax compliance efforts so that the business can have more confidence that moving down the risk scale will help provide more certainty, not less. 3 Q1. Do you think the current process provides HMRC with a comprehensive view of tax risk within a business? If not, what more should HMRC be doing, and how could this be improved? P/tech/subsfinal/MOT/2017 2
3.1 Yes, in our view the current process is effective when done properly, especially if the team involved has prior knowledge of the business. 3.2 However, problems can arise when the process is not followed correctly. HMRC s immediate priority should be to drive consistent good practice, irrespective of any changes to the design of the process. 4 Q2. Do you think the current Low Risk/Non Low risk distinction is optimal for HMRC and/ or business purposes? Would having a wider range of risk distinctions provide more clarity? 4.1 In our view, the current Low Risk/Non Low risk distinction is not optimal. Many Low Risk businesses feel they are a low priority for HMRC. Contact with HMRC in between risk reviews tends to be quite limited and in practice the support they receive from their CRM is minimal. Low Risk businesses can often feel that they do not receive sufficient reciprocation from their CRM when they need to talk to them. This, we believe, leaves HMRC in a poor position when starting their next risk review; new HMRC staff have little appreciation of how the business operates, and are essentially starting the risk review process from scratch. 4.2 Even if a business is categorised as low risk, there may be aspects of the business processes which are complex, and it would be mutually beneficial for both sides to have an understanding of the inherent tax risks this gives rise to at all times, not just at a point in time every three years. Where easy and timely access to the CRM is not available, this can create problems. HMRC have a role in managing business tax risk but if a business finds it difficult to obtain certainty from HMRC on major transactions which causes delays (eg on clearances etc) this could be counter-productive, eg it could drive undesirable behaviours and attitudes to tax risk. 4.3 The number of large businesses that are truly low risk from both a behavioural and inherent point of view is likely to be very small. A Low Risk rating currently provides neither incentive nor instruction regarding where a business s internal compliance processes could be made more efficient by investment. Whilst HMRC may take the view that efficiency is not in its remit, some opinion from HMRC that processes, whilst working and not giving rise to a risk of revenue loss, are not optimal or up-todate compared to other taxpayers could be helpful when tax departments are arguing for scarce resources to improve processes. Peer comparisons may also be worthwhile, in line with HMRC nudge techniques do you know that most businesses in you sector have better risk management methodologies? 4.4 It is also possible for a business to have weak risk controls in a defined area, and this is not well dealt with in the current risk assessment system. 4.5 We think there are advantages and disadvantages to having a wider range of risk categories. Advantages: 1. It could result in improved standardisation of approach by HMRC to the categorised risk profiles, particularly if based on objective, auditable processes. P/tech/subsfinal/MOT/2017 3
2. It offers the opportunity to bring greater certainty to business, especially if it results in HMRC s efforts being more accurately targeted. HMRC will, however need to allocate adequate resource to this process and its liaison team with large business the CRMs. Our members currently sees a variable level of CRM allocation to large businesses. 3. It might encourage lower risk behaviour. 4. It could allow for more frequent risk reviews depending on which category the business was in. 5. It might help heads of tax to communicate better within their groups; 6. It might make communications with company board members about tax risk easier. Disadvantages: 7. It might not provide more clarity compared with current best practice, particularly if the new categories are not clearly defined and differentiated. 8. Increasing the number of risk categories will increase the complexity of the system. 9. There is a risk it will generate a lot of time-consuming debate / arguments about borderline cases, although perhaps this can be avoided by having a spectrum of risk rather than specific categories. 10. There is always the risk that the more procedures HMRC introduce just result in more burdens on the already compliant whilst the non-compliant continue to be non-compliant. 4.6 Whatever model is ultimately chosen, HMRC need to have a more meaningful conversation with businesses to explain WHY they are put into which category, and how they can move to a lower risk one. It is apparent from speaking to businesses that often they are being told by their CRM that they have been put in the non-low Risk category simply because their business sector is deemed to be risky, rather then it being determined by the particular tax risk of the business itself. 5 Q3. Do you agree the level of risk within a business should influence the frequency of HMRC conducting a BRR? If not please explain. 5.1 Yes. 5.2 If the decision is taken to introduce a more detailed form of risk assessment, we would expect businesses in the very top level of risk to be under a constant process of risk assessment. Large businesses which are not complex and have good behaviours could continue to be assessed on a two or three-year cycle. However, we would expect the majority of businesses to fall somewhere between the two, and have some aspects of tax risk reviewed more frequently, possibly separating corporation tax, VAT and PAYE and each of them having their own two or three-year cycle depending on the business. This will help HMRC better understand what is important to the business, and the business to work with HMRC to reduce areas of risk that are of most concern to HMRC. 6 Q4. Are there any areas which you think are missing from the inherent risk factors within the current BRR framework? P/tech/subsfinal/MOT/2017 4
6.1 The risk framework makes no mention of the appropriateness of the accounting systems to the size and complexity of the business. This is a different question from the Senior Accounting Officer (SAO) requirement which requires the SAO to certify that the systems can produce accurate returns; or the behavioural delivery factor that focuses on errors; with enough manual intervention, any system can provide accurate returns without errors. HMRC are in an excellent position to have a view of what represents lower risk when it comes to accounting systems; manual intervention will ultimately have its limits. 7 Q5. Are there any areas which you think are missing from the behavioural risk factors within the current BRR framework? 7.1 No. 8 Q6. Do you think any of the areas identified should attract a greater or lesser degree of weighting due to their significant impact on overall risk? If so, please expand. 8.1 Ultimately, it should not be an arithmetical exercise. Weighting is only sensible if it helps get to the right overall picture of risk. It should be a qualitative analysis and discussion, so different aspects can be appropriately weighted. 9 Q7. Is the current approach to the use of tax planning in the BRR assessment appropriate? 9.1 In principle, yes. What should change is the insistence that an unresolved enquiry into old tax planning prevents a business from being in the low risk category currently. The purpose of the BRR assessment should be to decide what approach HMRC need to take currently in order to influence businesses current behaviour. Ongoing enquiries into what was done many years ago should be reviewed in terms of recent behaviour (eg cooperation) not past decisions (eg to use a particular tax arrangement). 10 Q8. Is there other evidence of the practical applications of tax risk governance that HMRC should take into account when assessing risk within businesses? 10.1 None that is immediately apparent. 11 Q9. Do you think HMRC should be more explicit around the risks in Corporation Tax (CT), Value Added Tax (VAT), Employer Duties (PAYE/National Insurance Contributions), and/or international tax risks? If yes, please specify and explain P/tech/subsfinal/MOT/2017 5
11.1 The objective of the BRR is to understand and respond to risk. It would therefore make sense to split up the risk review into constituent parts, as this would enable HMRC and the business to focus on the taxes giving rise to most risk in the business s particular circumstances. If the risks are different in different taxes, or within different parts of the group or different locations, this should be identified and appropriate distinct responses established. 12 Q10. Do you think there would be benefits in running a BRR that focusses on specific risk regimes or areas, for example dropping areas where there is negligible activity or risk with suitable businesses? 12.1 Yes, for example, if aspects of the business are low-risk, it would make sense to conduct a three-yearly risk assessment for those parts, retaining annual risk assessments in relation to higher-risk aspects. 13 Q11. If HMRC introduced a greater segmentation, what opportunities do you foresee for HMRC and business? 13.1 In our view this would provide a better framework for the relationship between HMRC and taxpayers, and HMRC s resources would be better deployed. If there was more detail it would be hoped that movement between categories would be greater than it currently is. 13.2 Of the three alternative models outlined on pages 18 and 19 of the consultation paper, we would favour the pyramid model (described by HMRC as a simple refinement of the current approach ). Our specific comments on the pyramid model are: 1. We suggest that the highest category should be high risk and the next highest should be significant risk (rather than the other way round). 2. We would actually foresee the distribution of large businesses looking more like a diamond than a pyramid, ie with most falling in the moderate risk category. You will note that this is presented as a spectrum not a series of bands. P/tech/subsfinal/MOT/2017 6
13.3 We would expect a small number of companies to be at the top of the diamond, due to high inherent and behavioural factors, and a few to be in the lowest part of the diamond due to low inherent and behavioural factors. Most companies would be in the ground between, mainly due to inherent complexity in some area of the business. 14 Q 12. What advantages should HMRC attach to these categories so as to reduce burden on lower risk businesses? 14.1 A more realistic assessment of actual risk should bring benefits in itself, in that CRMs should find it easier to identify if a particular transaction carries significant likelihood of an unreasonable outcome for the Exchequer. 14.2 The general incentives to be compliant should be sufficient for a business to want to seek low risk status, so ideally it should not be necessary to create special incentives for a low risk business. It would be difficult to create something artificial as it would by definition lack substance, but on the other hand, there is a risk that HMRC unintentionally create perverse incentives, for example by giving low risk, but nonetheless complex, businesses less attention / support, so that they would actually choose not to be in a low risk category. 14.3 There is a limit to how significant HMRC s ability to influence behaviour through additional support for low risk businesses can be, because it will largely depend on how HMRC s resources are prioritised and allocated. The success of the types of incentive discussed for low risk taxpayers will depend on the quality and resources HMRC are able to devote to these advance clearance and speedy response services. 14.4 Those resources are either to check or to support large businesses. Transparency and the certainty that comes from confidence that the resources will be made available, when necessary, are a far bigger incentive for business to become or remain low risk than vague assertions that clearances will be processed quicker or that a view on novel arrangements will be provided more speedily. 14.5 Offering quicker clearances implies either priority access to resources or less scrutiny. The latter may be acceptable in certain circumstances, but the former is wrong. HMRC would find it very difficult to justify prioritising resources to minor clearances for low risk businesses ahead of a major clearance for a potentially major investment into the UK by a non-low risk business. 15 Q13. HMRC is encouraging businesses to adopt lower risk behaviours. Can you identify anything else that would further encourage lower risk businesses to maintain or adopt lower risk behaviours? 15.1 Most large businesses are now risk averse when it comes to taxation, and it is hard to see what further could be done to encourage low risk behaviour. P/tech/subsfinal/MOT/2017 7
16 Q14. For those businesses at the higher end of the risk spectrum, what are the opportunities to encourage lower risk behaviours? This could include adopting a Code of Practice for the highest-risk customers, similar to the Code of Practice on Taxation for Banks. 16.1 We are sceptical that asking the highest risk businesses to sign up to a code of practice on tax will be effective in incentivising them to move from high risk to low risk. HMRC already have all the tools they need. 16.2 The most effective way to change the behaviours of those at the highest risk end of the spectrum is a continual engagement from HMRC. 17 Q15. Do you agree that for a business to be classified by HMRC as low risk it should be expected to fulfil the requirements set out for a Tax Control Framework (TCF)? 17.1 Yes, but not in a mechanistic way. The TCF and the impact it has on risk should be understood and HMRC s responses determined accordingly. 18 Q16. Does HMRC s existing BRR process already encapsulate the content of a TCF (and more)? If you consider there are any missing areas, please explain. 18.1 It should do as part of delivery as it is the way to maintain appropriate tax accounting arrangements. 19 Q.17 Are there any others areas of the BRR that HMRC should consider as part of the review of the BRR? 19.1 No further comments. 20 Acknowledgement of submission 20.1 We would be grateful if you could acknowledge safe receipt of this submission, and ensure that the CIOT is included in the List of Respondents when any outcome of the consultation is published. 21 The Chartered Institute of Taxation 21.1 The Chartered Institute of Taxation (CIOT) is the leading professional body in the United Kingdom concerned solely with taxation. The CIOT is an educational charity, promoting education and study of the administration and practice of taxation. One of our key aims is to work for a better, more efficient, tax system for all affected by it taxpayers, their advisers and the authorities. The CIOT s work covers all aspects of taxation, including direct and indirect taxes and duties. Through our Low Incomes P/tech/subsfinal/MOT/2017 8
Tax Reform Group (LITRG), the CIOT has a particular focus on improving the tax system, including tax credits and benefits, for the unrepresented taxpayer. The CIOT draws on our members experience in private practice, commerce and industry, government and academia to improve tax administration and propose and explain how tax policy objectives can most effectively be achieved. We also link to, and draw on, similar leading professional tax bodies in other countries. The CIOT s comments and recommendations on tax issues are made in line with our charitable objectives: we are politically neutral in our work. The CIOT s 18,000 members have the practising title of Chartered Tax Adviser and the designatory letters CTA, to represent the leading tax qualification. The Chartered Institute of Taxation 6 December 2017 P/tech/subsfinal/MOT/2017 9