Tax outsourcing: buying time

For the time-strapped finance director, outsourcing regulatory compliance
work has obvious merits. That is why many have already handed their corporation
tax and VAT work to a third-party organisation, or farmed out the preparation of
statutory and consolidated accounts.

And the nature and amount of such outsourcing has both increased and changed
in recent years. Over the last decade, according to those close to the market,
companies have increasingly sought to outsource multiple countries’ functions
and processes across their business to a single supplier. The advisers handling
outsourced corporation tax compliance, VAT compliance, calculating the tax
provisions in the consolidated accounts and producing the statutory accounts can
also extend to providing related, adjacent services and sub-processes, such as
advising on tax payments or getting involved in tax enquiries with authorities.
And there is a strong trend towards converging these processes and using a
single supplier for all of them.

But outsourcing these statutory pieces does not mean handing responsibility
and risk to an outsider, especially in the age of the senior accounting officer,
usually the FD, who is legally bound to sign off on their company’s tax
arrangements – with personal liability. While stressing that FDs should be aware
of the limitations of their in-house resources, and should actively seek
outsourcing when dealing with complex issues, Rakesh Gulati, finance director at
consultancy Intelligentsia Financial, warns that “the buck for tax compliance
stops at the FD’s door”.

So just how risky is outsourcing the compliance function and how can FDs
mitigate that risk?

As always, it depends on your business. In the global tax risk management
function at mining giant Rio Tinto, Mark Andrewes oversees a global tax function
that deals with both tax compliance and planning across its operations in South
America, Asia, Europe and southern Africa. “It’s extremely important not to put
too much distance between the tax compliance function and the planning
function,” Andrewes argues. “Tax planning only has value if it is correctly
reflected in the tax return, and if it survives on audit.”

Furthermore, he notes, it is often the case that tax “horror stories” come
down to a straightforward decision that has been taken in the tax return – that
then turns out to impact current or future tax planning.

Stick together

“It is important to have both the compliance and the planning functions in
the same team. There’s too much risk in dividing them: the tax function should
still have accountability and responsibility,” Andrewes stresses. “But we are
being constantly challenged to be more efficient, and to reduce costs by
delivering continuous efficiency improvements.”

Beyond the emergence of the senior accounting officer role, FDs still need to
be front and centre in strategic and big-picture decision making. Outsourcing
tax compliance is one level FDs can pull to give them the time to effectively
engage with this. But it is up to FDs to let go of detail on daily transactional
stuff.

Garrett O’Keeffe, a business leadership coach whose clients have included BT,
Vodafone and O2, says that FDs can often feel the need to retain control over
the tasks that they used to perform as they came up through the ranks. “There’s
an element of comfort attached to dealing with familiar detail,” he adds.

But that is a temptation that must be resisted. FDs must recognise that they
are part of their organisation’s senior leadership team, “working alongside the
chief executive on strategic issues, rather than dealing with detail,” warns
O’Keeffe.

Jennifer Raines, a former FD and director of Finance Heads, a collaborative
group of interim financial executives, agrees that outsourcing some of the tax
compliance burden, particularly for large multinationals, makes sense.

“The opportunities facing the FD come from spending more time in a strategic
space, not a transactional one,” says Raines.

“Where do potential acquisitions lie? What market growth opportunities are
there? How can I work better with the chief executive and the board to drive the
business forward? It’s the answers to questions like these that matter most, not
the operational minutiae of day-to-day compliance and transaction processing.”

An effective finance function

Nick Jarman, partner in charge of finance function effectiveness at PwC,
points to a recent study by the audit firm that examined the effectiveness of
the finance function at more than a hundred FTSE 200 companies.

“The study clearly shows that both chief executives and finance professionals
have some significant hurdles to overcome before the finance function truly
becomes the strategic partner that the business requires,” he says.

He points to the report’s findings that chief executives are generally
unhappy with the service they are provided with by the finance function and the
FD – and links this to several recent high-profile cases of FDs being passed
over for the chief executive role. By freeing up time, FDs can devote more
energy to strategic matters, as well as collaborating with other parts of the
business.

To begin with, many FDs can add immediate value by turning transactional data
into actionable information. “There’s a huge opportunity to analyse data, rather
than just process it on a transactional basis,” says Mike Ellis, FD at payroll
and HR specialist ADP.

Indeed, he relates, a senior member of his finance team is tasked with doing
just that.
In his own FD role, Ellis explains, he has recently been working with the
product marketing team to assess whether potential new lines of business can be
competitive, as well as with the sales team to develop pricing strategies.

“The biggest thing is to be able to spend more time supporting the business –
helping to drive growth, and improve margins,” he says. “The opportunity really
is significant.”

This article first appeared in the June issue of sister publication
Financial Director. For more ideas on outsourcing tax compliance, read the
Financial Director guide. Read the Financial Director Guide to Tax
Compliance Outsourcing at
financialdirector.co.uk