The need to evaluate and control tax risk is probably higher on the corporate governance agenda then ever before, and this is likely to increase.

A strategy to identify and anticipate problems establishing clear processes, lines of responsibility, proper documentation etc underlies a robust approach.This may include looking at how the tax function fits into the organisation, the coherence of tax strategy, competencies and checking methods, plus communication and relationship issues within the organisation and with HMRC.This is now even more important in the new environment where HMRC can offset liabilities between the different taxes it administers.True Partners Consulting (UK) LLP are well placed to assist businesses, either as part of their internal audit processes or on a free standing basis, with a review of their tax risks.We provide genuine independence of the external audit function, professionals with many years of business tax experience and a value based way of working closely with our clients.

Cross border business, be that within groups or with third parties, presents it own sets of tax challenges.The strong international focus of our practice makes up well placed to help evaluate and address these.Exploring best approach will be based on investing time in getting to know your needs and requirements on an individual basis.Risk needs to be addressed in commercially efficient ways and also so as not to shackle actions and opportunity.

A full checklist on tax risk would be long, with items of most relevance varying by organisation and over time.New risks emerge and, as law and practice change, familiar areas of risk present fresh challenges.We highlight not the “top ten” risks, but illustrate a diversity of risk types that can often effect businesses with real costs.

1.Penalties-the cost of getting it wrong

For periods starting from 1 April 2008 onwards new penalties geared on tax adjustments apply based on behaviour.These penalties apply to all the major taxes administered by HMRC.For example, careless errors can mean penalties of up to 30%, with deliberate errors meaning penalties could reach 70%.A mistake without carelessness will not lead to a penalty.

The penalties can apply where losses are reduced as well as profits increased.

Companies will need to look at the strength of their compliance process, from how information is sourced through to how items are disclosed on their returns so as to minimise the risk of penalties.

2.Transfer pricing

Transfer pricing is seen as a major risk area by HMRC who have undertaken much Inspector training and a significant recent redeployment of resources to increase their scrutiny.

Identification of all relevant transactions (including intangibles) and the adoption of fiscally valid pricing methods need to be combined with appropriate levels of econometrics and documentation.This needs to be mediated with commercial factors and the competing pressures of different tax regimes.

In signing a return a company is affirming it adheres with transfer pricing rules, even between UK members, and lack of care could result in the new levels of penalties being imposed and in certain cases an increase in its VAT liability.

3.Hidden tax charges

Tax costs can arise even when a business is being rearranged internally.

Examples include:

• moving items from stock to fixed assets and vice versa, with the 2008 rules changes imposing market value on appropriations from stock creating an extra source of risk.
• moving capital assets and intangibles between companies in cases where a tax free transfer might not apply (eg to a joint venture) or where there may be a deferred exit cost when the receiving company leaves the group.Recent changes of law make the scope and risk of degrouping charges greater.

A tax review should be integrated into evaluating the impact of such changes, and the necessary details of past transfers retained.

4.Employee matters

Across the range of companies HMRC tax levies on staff related matters continue to be among the most expensive.Even relatively small adjustments, multiplied over the workforce and then taken back six years with interest and a penalty, can mean large adjustments.

Rules and practice are very detailed, with significant changes and a traditionally tough scrutiny by HMRC.Some of the key challenges relate to:

• Adherence with dispensations.
• Travel and subsistence payments.
• Casuals and consultants.
• Flexible benefits packages.
• Company vans.
• Share based payments

Much of this may seem familiar but companies change their ways of working just as much as the rules change and large tax settlements with HMRC remain all too common.

5.Construction industry scheme (CIS)

CIS can be overlooked by companies who do not see themselves as normal construction businesses and so may not operate correct procedures with their subcontractors.

Property developers and gangmasters are also treated as mainstream contractors. Others may be “ deemed contractors” if their spend is over £1m averaged over three yearsmanufacturers, retailers and housing associations are examples of this. The rules changed significantly in April 2007,so past practice may need to be refreshed.

6. VAT

The responsibility to account correctly for VAT rests with the VAT registered business. As well as determining the correct rate of VAT to be accounted for, attention also needs to be paid to:

• Property transactions, both sale and lease
• Transactions which are VAT exempt and the impact on the right to recover VAT
• Cross border transactions, both goods and services

There are also statistical reporting regimes where goods are traded cross border in the EU, which must be adhered to.

7. Tax schemes

Schemes to avoid tax have been put under new pressures in recent years because:

• Most such schemes are now disclosable under the disclosure of tax avoidance schemes rules so HMRC become aware of them much earlier than before.
• Legislation has tackled many schemes with specific rules or counter-action where there is an avoidance motive (eg with capital losses).
• The Courts have adopted a more purpose based approach in looking at transactions “realistically”.
• HMRC have said they will litigate rather than do deals.

Companies need a policy in this area. This may not result in all schemes being rejected out of hand but stringency in selection, implementation and disclosure are essential.Reputational and HMRC relationship issues and the risk profile need balancing against the right for example to legitimately plan commercially driven transactions.

8.Company Residence

As businesses seek to conduct activity outside the UK, or even relocate to save tax, questions of residence are fundamental.This involves evaluating where a company is centrally managed and controlled.As is widely known where directors hold boards meetings is critical.This is not always as simple or conclusive as first seems, under enquiry a lot of evidence can be sought as to where management really resides.The recent Special Commissioners decision in Smallwood has reaffirmed the idea there can be two places of central management.

Where there is such dual residence a double tax treaty between the UK and the other country will often operate requiring the place of effective management to be decided.The Smallwood judgement suggests a tie break decision is then needed on which is the country of residence.

Prolonged disputes can arise where the residence was not planned or evidenced, or commercial pressures effect the subsequent implementation.The process needs to be mapped and costed, relevant tax authority permissions obtained and evidence and monitoring processes maintained.

9.Revenue Powers and Documentation

HMRC commonly ask to see documentation or analysis in reviewing a return.

This could, for example, be documentation on a large or abnormal transaction, analyses of spend on capital allowances or R&D, transfer price etc.

Companies need to think how tax sensitive transactions are documented to deal with queries and ensure their documentation of company business (including perhaps that produced in risk management) does not inadvertently create the wrong impression for HMRC to exploit.

Inadequate supporting papers may lead HMRC to say there has been a careless approach, with penalty consequences.

Businesses also need to know what is permissible, or at least reasonable, for HMRC to ask to see and when.The 2008 Finance Act saw changes and increases in HMRC powers.For example:

• aligning requirements to produce documents and information
• powers to inspect business records on site
• record keeping

HMRC are developing their guidance and the rules contain a number of safeguards.

10.Accounting for tax

A new IAS 12, which could apply from as soon as 2011 will involve:

• changes to current and deferred tax accounting
• increased disclosures of uncertainties
• the measurement of uncertain tax positions

Significant differences between UK GAAP and IAS where for example buildings formerly qualified for IBAs could result in large charges to deferred tax.

For those effected there is the need to plan forward-and to evaluate how HMRC may use the extra information.

For more information contact:

Les Secular, Abbas Sadak