Tax planning: steer clear of the rocks
Poor tax planning can ultimately hole a company beneath the waterline
Poor tax planning can ultimately hole a company beneath the waterline
The tax landscape is undergoing a transformation thanks to pressure from,
well, all sides and guess who’s caught in the murderous crossfire? That’s right,
the law-abiding taxpaying business.
HM Revenue & Customs is hell-bent on stamping out all forms of tax
avoidance and things are getting to a point where many UK companies are
contemplating uprooting and setting sail for cosier fiscal climes.
So what exactly can a company do to effectively manage its tax liability in
today’s environment and what are the areas that could cause it the biggest
The buck stops at the boardroom
Tax advisers have been highlighting for some time –with good reason – that
tax is high on the list of corporate governance issues that investors, the media
and regulators use to work out how well a company is being run. Companies that
are fully in control of their tax affairs know what is possible within their
organisation’s particular constraints and those that can communicate this
information effectively to their stakeholders will be highly regarded by the
A leading company in the tax field should:
‘The number of companies that actively acknowledge the strategic significance
of tax remains relatively low,’ says KPMG’s head of global tax practice,
But those that do tend to use tax to create value, perhaps in the form of a
business-driven piece of tax planning, a well-executed disposal, or stealing a
march on competitors by anticipating compliance developments.’
UK business operates at the centre of a treacherously changeable regulatory
bunfight. The European Court of Justice has become more influential on UK tax
policy than ever, and has issued some landmark rulings, while HM Revenue &
Customs is in the midst of a huge clampdown on tax avoidance.
Shrewd tax planning is an increasingly difficult policy for companies to
adopt in the face of HMRC’s avoidance drive. It might seem an obvious point but
staying up to date with developments – however benign they may seem at first
glance – will save corporates a lot of heartache.
HMRC’s anti-avoidance terriers have a website that sets out in black and
white exactly what – for now– is expected of companies in terms of disclosure
for tax arrangements. It covers the whole spectrum of income tax, capital gains
tax, land tax, stamp duty and corporation tax.
Treading the fine line between shrewd tax planning and tax avoidance can be
fraught with difficulty especially as the avoidance minefield is constantly
changing. In terms of tax foresight, this is one of the most prevalent issues
for businesses because a critical distinction will be made between what’s in and
what’s out of the taxman’s corporate net.
For businesses with controlled foreign companies, the wait to see who wins
out in the ECJ-Treasury tug of war is critical, and tax advisers are bracing
themselves for the outcome, which is expected in the very near future.
As part of its long awaited response to the challenge from the ECJ – which
says that, as long as a business is engaged in ‘genuine economic activity’ it
can continue enjoying the lighter tax burdens of other EU countries for
operations based in those countries – the government has given its clearest sign
yet of how it plans to shore up its tax base while keeping companies sweet.
The Treasury says that the consultation on its proposals will ‘also consider
the implications of any such reform for other aspects of the UK tax regime, such
as interest relief’.
However, Deloitte’s head of tax policy, Bill Dodwell, says that this is
probably not on the cards.‘ It looks like the real battleground will be on
controlled foreign companies, where it will have to be decided what kinds of CFC
income are deemed to be eligible for tax relief.’
Certainty is all FIN (financial interpretation number) 48 is another poser
that requires all companies filing US GAAP accounts to disclose any uncertain
tax positions in their financial statements and quantify the financial risk from
FIN48 is a tough and very prescriptive standard that will force businesses to
publish the penalties or interest charges that could arise from a tax scheme, as
well as the tax charge itself.
FIN 48will cast a spotlight on the tax planning of leading FTSE 100
companies, but all UK companies could eventually face a similar grilling, as the
International Accounting Standards Board is looking at introducing an IFRS
equivalent to FIN 48, according to Deloitte’s Ken Wild.
Under FIN 48, businesses must assess all their tax schemes and apply a
complex mathematical analysis to decide whether tax liabilities could arise from
them. Schemes likely to incur a liability will have to be valued and published
in a company’s accounts.
Richard Murphy, director of Tax Research Limited, says the standard will
protect investors and ensure companies are correctly valued. He says that
Glaxo-SmithKline’s $3.4bn (£1.8bn) settlement with the US Internal Revenue
Service, and Vodafone’s tax issues, demonstrate how important it is to disclose
uncertain tax positions.
‘Companies have been taking tax risks that shareholders don’t know about,and
have been incorrectly valued as a result,’ Murphy says. ‘There are substantial
future cashflows at risk and shareholders need to know about it.’
The role of the tax planner
It’s the little details that count in tax and any planner worth their salt
will offer certain services. It’s fairly standard for tax planners to hold
workshops to help identify the key stakeholders in a business, as well as their
expectations on the business’s approach to tax.
These help pin down what role tax should play within the business, what the
strategy should be, the risks associated with that position and the actions that
need to be taken to manage risks and achieve goals.
Research compiled by planners can give an objective view from outside the tax
function to help make sure that the strategy is aligned with the wider needs of
the business. Benchmarking can be used to validate strategy against the
planner’s preferred practice standards.
A competitive environment?
Competition is fierce for the consumer buck, so are we really making enough
effort to sustain the fiscal health of UK business while also filling the tax
trough? A lot of people think not. The CBI has warned that an uncompetitive tax
regime is holding back the UK economy and prompting companies to relocate
Ernst & Young also says that tax policymakers need to make significant
changes to the tax system if the UK is to remain an attractive venue for foreign
investment. Chris Sanger, E&Y’s head of tax policy development, says that
while tax is not the only reason for investing in a country, it is increasingly
‘We need to move away from complex legislation to robust and clear
principles,’ Sanger says. ‘The Varney review is a step forward, but in reality
much more has to be done. We are at a crucial point.’
The offshore view
If the online gaming community, which has a large number of offshore
companies operating in the UK, can be taken as a yardstick, the UK’s tax efforts
have a long way to travel, which means that further tax planning upheaval could
be on the horizon.
Gibraltar-based Partygaming, recently announced as the FTSE 250’s leading
company and just the kind of company the UK would love to have in its tax fold,
says that it won’t be upping sticks any time soon. Finance director Martin
Weigold says: ‘While there are other countries like Gibraltar, Antigua and
Alderney that offer licensing coupled with competitive tax regimes, I think that
will prove a tough call. For PartyGaming, there are no substantial advantages to
being located in the UK.’