Tax risk: Why tax and risk need to speak the same language

22 June 2016

You only have to glance at the newspapers in recent months to realise that tax has become a high profile issue. The tax paid by corporates in particular has become a topic of interest, and not just to HM Revenue & Customes (HMRC). The papers, the public and politicians all care. The combination of that concern and the ongoing development of the government’s tax transparency agenda have fed into the Chancellor who announced in the budget that details about an organisation’s tax strategy need to be publicly disclosed supported by governance and risk framework documentation.

The end result is that tax, which has often been ignored or miscalculated on companies’ risk registers, is now a hot topic.

This is, relatively speaking, a whole new world for the tax function. The potential cost of getting tax wrong (or not being seen to get tax right) has meant up to 40% of a FTSE 100 tax team being refocused on risk management.

So where does tax risk originate? Tax risk isn’t typically created within the tax function; it happens earlier in the value chain, with data, and with people making decisions at the front end of the organisation without sufficient understanding of the tax consequences.

In an increasingly global, mobility-heavy world, virtually all major business decisions will have a tax consequence, from the development of a new product to the opening of a sales office in a new country. Tax risk, in other words, is broad, varied and inextricably tied to commercial operations/ development – and that makes it difficult to manage without a clear strategy and appropriate tools.

HMRC have been driving an increased level of transparency around inherent risks and controls since the Senior Accounting Officer Regime (SAO) was introduced in 2009. This requires organisations to certify annually that they have appropriate tax accounting arrangements in place, and has led to HMRC asking to see the company’s tax risk register/control framework as part of their risk assessment process.

The regulator has taken a similar approach and introduced the Senior Manager Regime (SMR) which makes executive management accountable across various functions. Although tax is not - yet - a prescribed function of itself within SMR, tax risks and responsibilities are inherent to a number of the roles.

We know that HMRC and the regulators are working closely together. Both sides are drawing parallels between the approach to tax governance/ SAO and SMR. The indication being that a breach under SMR may be indicative of a breach in tax and vice versa.

Identifying tax risk requires the application of relevant tax rules to a group’s commercial operations to highlight relevant risks/ reporting requirements and the broader systems, processes, data and controls used to manage them.

One of the problems is that the risk management function tends to deal with well-defined, established risk procedures. Tax is so broad that the tax function has typically found it challenging to clearly articulate and quantify key risk areas in a way the business can understand. There’s very little common language between the two functions. That will have to change.

  Tax & risk

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