Corporate tax risk and tax avoidance: new approaches

The relationship between tax authorities and large corporate taxpayers is a concern world-wide as can be seen from the 2008 OECD Study into the Role of Tax Intermediaries. In the United Kingdom, HMRC have been developing a risk rating approach to tax risk management as part of their Review of Links with Large Business. The approach is designed to promote an enhanced relationship between HMRC and the taxpayer, based on trust and transparency. The objectives include the improvement of resource allocation and the encouragement of companies to consider their position so as to achieve the benefits of low risk rating, which may involve altering their tax planning strategy. In addition, new approaches to tax avoidance legislation such as targeted anti-avoidance rules and principles-based legislation are being introduced or considered. This article discusses a survey of tax directors in which the authors used detailed tax planning scenarios to investigate the views of tax directors on the impact and success or otherwise of these new approaches. The views of tax directors are only one factor in judging the success of these developments, but given that one aim of current tax policy is an enhanced relationship with corporate taxpayers, directors’ views are significant in assessing the progress being made. The article analyses these views and comments on these new approaches to tax risk management.

Tax risk and tax avoidance: what progress with Varney?

A new detailed survey of UK tax directors and other stakeholders conducted by the Centre provides evidence that the relationship between HMRC and large UK businesses is improving, following the implementation of the Varney Review which examined that relationship. The results suggest that the procedures are worth rolling out to smaller businesses. But the Client Relationship Manager is crucial: investment in recruitment, retention and training of good CRMs is vital.

HMRC now assesses large companies according to their “risk”. This risk rating is now widely understood to be based on behavioural rather than structural factors although there is still a belief amongst some companies that their level of inherent complexity is a barrier to a lower rating. Measuring behaviour through transparency and disclosure is generally considered to be positive and attainable. However, incorporating tax planning remains of equivocal value: there are some companies for which the potential benefits of a low risk rating do not outweigh the value of being able to use all legal methods to minimise tax costs.

Despite support for the idea of principles-based legislation, many considered draft legislation and some targeted anti-avoidance rules (TAARS) with motive based tests to have considerable problems given the range of possible interpretations of some types of behaviour. Work done in HMRC on improving resource allocation, speed of settlement, and trust generally between HMRC and large taxpayers is applauded but the problem of drawing the line between tax planning and tax avoidance (in the pejorative sense) remains one to be solved.