Enhanced risk assessment for large business compliance

HMRC has published its response to the consultation on enhancing its risk assessment approach to large business compliance. The Government will take forward proposals to replace the current binary system of low or high risk categorisation of large businesses with a system of categorisation that more accurately reflects the more complex situation. This will now be developed by HMRC and piloted during 2018 with a view to rolling out the system to all large businesses in 2018/19.

Background

In September 2017, HMRC released a consultation document, “Large business compliance: enhancing our risk assessment approach”, seeking feedback on HMRC’s approach to evaluating and managing the tax risk profile of large businesses. The consultation offered the opportunity for businesses to engage with HMRC to improve the Business Risk Review (BRR) process going forwards, focussing both on how HMRC might better target their risk assessment and also how businesses might be encouraged through this system to move to lower risk categories.

HMRC’s current system of Customer Relationship Managers (CRMs) and BRRs are the cornerstone of how HMRC interacts with large businesses in the UK. This typically covers businesses that operate in the UK with a turnover of more than £200m (or which are otherwise complex or a part of a large multinational group).

The BRR involves assessing these large businesses, based on the understanding of the allocated CRM, based on the tax risk they pose. This risk assessment will typically consider three groups of risk factors:

• inherent risk factors: arising from the complexity of the business and the tax issues which typically arise in that area, boundary issues arising from international arrangements and aspects of change, such as the pace of acquisitions/disposals and product/service changes
• behavioural risk factors: arising from governance procedures concerning openness and cooperation with HMRC and management’s accountability for managing tax risk, ability to deliver accurate tax returns through accurate systems and processes and tax strategy, including its willingness to engage in artificial tax planning, and
• contribution: whether the amount of tax declared looks reasonable in the light of what is known of the business.

Using the BRR, HMRC will determine if a taxpayer is Low Risk. Any taxpayer that is not Low Rrisk, is automatically Non-Low Risk. A Low Risk taxpayer is one that has an open and transparent relationship with HMRC, effectively manages their own tax compliance risk and who HMRC trust will not engage in aggressive tax planning. HMRC trusts that Low Risk taxpayers will bring issues to discuss promptly and pay the right tax at the right time. HMRC expects Low Risk taxpayers to give advance warning of any significant or potentially contentious voluntary disclosures; and share their approach to identifying and managing tax compliance risk across the business. Trusting the taxpayer to comply with their obligations and involve HMRC as necessary is one of the outcomes of Low Risk status. In cases where a Low Risk taxpayer breaches this trust, HMRC will take appropriate action which may include removal of Low Risk status. Low Risk taxpayers are effectively rewarded with less HMRC scrutiny and fewer audits.

The consultation sought responses to a range of questions focussed on improving this process both for HMRC and for taxpayers. In particular, the consultation looked at the is the criteria used by HMRC within the BRR review and whether additional areas should be considered. Another option considered was making the process more specific to particular areas of high risk where a business may only be high risk in relation to a limited section of the UK tax regime.

The consultation also looked at the outcome from the BRR process and the option of a more nuanced categorisation of taxpayers, perhaps using more segments (significant, high, high-moderate, low-moderate and Low Risk).

Summary of responses

The Government’s response to the consultation mainly sets out the responses of business to the original consultation, recognising that this provided several suggestions as to how HMRC could enhance BRR, including:

• classifying large businesses across an increased number of risk categories
• taking more account of the tax risk management work already required by large businesses
• prompting continuous dialogue between HMRC’s Customer Compliance Managers (CCM) and businesses on reducing tax risks, and
• clearly set out the advantages and disadvantages of being classified in a certain risk category.

As a result of these responses, the Government has identified a number of key recommendations which it can adopt and others where further research and investigation is required. In particular, the Government accepts the view that:

• the BRR’s binary Low Risk/Non-Low Risk categories should be changed so it accurately reflects the differences across the large business population. HMRC is committed to exploring the optimal level of risk categories for the BRR, and accepts there should be a series of risk categories that clearly distinguish between low and high risk
• the enhanced BRR process should take more account of the tax risk management work already required by large businesses, such as the Senior Accounting Officer (SAO) provisions and the publication of tax strategies
• the BRR process as a whole should prompt and support continuous dialogue between the CCM and the business on reducing tax risk. The enhanced BRR should therefore provide businesses and HMRC with a clear set of actions and timelines, and
• while there should be clear advantages and disadvantages of achieving a certain risk rating, the Government is aware that it needs to create a consistent and level playing field for all businesses. This area will therefore require further investigation. In addition, a low risk rating should only be provided to large businesses that adhere to the OECD’s Tax Control Framework or have similar controls in place.

Next steps

HMRC will now develop a new version of the BRR reflecting these proposals with a view to piloting it later in 2018 across a defined group of large businesses. Subject to the pilot delivering the desired outcomes, the enhanced BRR will be rolled out in 2019/20.