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Data is the key to managing risk and compliance

Tax Authorities have evolved in their approach to tackling tax avoidance and non-compliance. Utilising forensic software, data analytics and information sharing, Tax Authorities are able to target taxpayers where they suspect non-compliance quickly and robustly.

Economic pressure is building as we start to come out of the COVID-19 pandemic. Inevitably, the costs have been significant and the bill for Government support for businesses is expected to reach more than £150 billion according to the May 2021 National Audit Office COVID-19 cost tracker. In an extraordinary time, the UK’s National Debt is now close to 100% of UK GDP. It is no wonder that 72% of UK CEO’s are concerned about increasing tax obligations and policy uncertainty, according to PwC’s 24th Annual CEO Survey.

HMRC’s 2020 Annual Report issued in November 2020 states that an additional £36.9bn of revenue was generated by tackling avoidance and non-compliance. Moreover, tax geared penalties issued due to non-compliance doubled between May and November 2020. As we move out of this unprecedented period, we expect to see Tax Authorities much more targeted in their approach, allocating resources to risk and challenging tax payers, both in relation to tax planning but also reliefs taken during the pandemic. For example the Treasury has allocated circa £100m to create a Taxpayer Protection Task Force consisting of 1,250 inspectors to target fraudulent claims such as those claimed under the Furlough and Eat Out to Help Out Schemes utilised by many during the pandemic.

There are also a number of consultations underway in the UK such as the Uncertain Tax Treatment Consultation that, if enacted, will require taxpayers to disclose uncertain positions taken in their tax returns to HMRC, where the amount of uncertainty is £5m or more of tax. Based on current drafting, it will apply to returns filed after April 2022. Therefore many organisations will be making calls on areas such as payments on account, coding entries into journals and transactions that will feature in tax returns for this accounting period, meaning a different lens will need to be taken to data.

It has never been more important for organisations to understand their data and prepare proactively, to protect against enquiries, tax geared penalties and ultimately reputational damage. So, what practical steps can organisations take to manage this risk?

Understand what the data says about you

Tax Authorities will have access to multiple sets of data. This could be through required disclosures such as Country By Country Reporting or data that tax authorities are able to access directly through data submitted digitally, for example Making Tax Digital in the UK and SAF-T in some European jurisdictions. Equally it could be data that tax authorities have collated from public databases or that has been shared with them by other tax authorities through information exchange. Tax Authorities will be manipulating this data through forensic software and data analytics to either form a risk profile or benchmark organisations against others.

This could mean tax authorities could have pieced multiple data points together in a way that organisations haven’t, generating a profile which they may not be aware of. Organisations should understand how data is structured and reconciled at a multi tax level and a cross border level. Moreover, the data should be analysed and benchmarked against tax authority criteria to identify risk and then remediate proactively to minimise cost and penalties. Technological advances mean that data can be connected and analysed cost effectively, allowing for investigative review and benchmarking.

Of course, getting data in order requires a commitment of resources – time, staff and money. It is important that Tax is integrated into broader Finance and has a seat at the table in any business transformation, meaning data collection, storage and analytics processes are efficient and modern.

Evidence is key

It is critical that organisations are able to evidence transactions and tax positions taken. Often it comes down to being able to evidence the motive of a transaction. If tax authorities raise enquiries, the best defence will be having everything in order. Often, transactions fail to stand up to scrutiny because of poor implementation or the inability to support the commercial rationale of a transaction. Consistency is critical.

Getting data in line and structured well means organisations can provide accurate information quickly. To achieve this, it is important to have a clear definition and accurate view of data, because data can mean different things to different people. In this context, data means any piece of information that the tax authorities deem to be relevant and reasonable for their enquiries. This includes not only annual reports but also meeting minutes, correspondence between key decision makers such as emails but more recently instant messages, text messages and social media posts.

Often the time lag between a transaction being executed and an enquiry by HMRC means that key individuals may have moved on or systems have been upgraded. Being able to access data that is well structured in real time and form an evidence file will save a huge amount of time and often minimise penalties (potentially suspending them). Experience tells us that significant time and cost is incurred in extracting data and information from systems, which could have been mitigated if collected at the time of the transaction or point when the tax position was being determined.

Implement robust governance

Don’t underestimate the power of strong governance both in presenting to tax authorities but also in managing risk. Being able to evidence robust governance and testing of controls will provide comfort to tax authorities that risk is being monitored and managed. This should ultimately lead to less tax audit activity. Regimes in the UK such as Senior Accounting Officer and Corporate Criminal Offence come with a burden of proof on the taxpayer and HMRC are now asking to see documentary evidence and proof of testing controls as part of the annual Business Risk Review.

Governance doesn’t stop there. Organisations also need to consider key policies such as data retention policies. It is critical that these are documented, understood and owned by senior members of an organisation.

We often see a disconnect between the business, legal and the IT function from a data retention and availability perspective. The worst case scenario is assuming that the data exists when it actually doesn’t. For example leavers data tends to be deleted quickly which can then cause issues if organisations need to retrieve data in relation to that individual. It is also important that data is backed up and consistent. If an investigation results in the only copy of data being seized, this will restrict the organisation in managing an investigation.

Monitor and maintain evidence to support structures

Often transactions fail on poor implementation. Where structures are dependent on the functions or activity of individuals, for example transfer pricing, it will be important to carry out periodic reviews of those activities and test the governance. Understanding where key data sits, who the key individuals are and key functional criteria will enable the collation of information such as e-mails, board minutes and other documentation to create a consistent ongoing evidence trail.

This is an ever-evolving area and one that needs careful management. Please do get in touch if you would like to discuss further.

Contact us

Andy Olymbios

Andy Olymbios

Head of Tax Disputes Network, PwC United Kingdom

Tel: +44 (0)7866 744143

Matt Joel

Matt Joel

Partner, PwC United Kingdom

Tel: +44 (0)7809 552273

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