HMRC enquiries: Why a strong tax risk management framework is critical for businesses

It is a common misconception that an HMRC enquiry starts on receipt of an enquiry letter. Although a formal notification must be issued by HMRC within a specific timeframe, prior to sending this letter, HMRC will have conducted a risk assessment of the business to estimate any potential amount of tax lost and the years impacted.

As we approach some normality after the pandemic, now is a good time for businesses to consider the strength of their tax risk management framework and its compliance with tax governance regimes.  Taking these steps now could prevent an HMRC enquiry.

HMRC approach to identifying risks

HMRC has access to a vast amount of information, both from the UK and overseas, to help identify potential risk areas within a business. These risks are usually identified when discrepancies are found between information from third party sources and details filed as part of a tax return. An enquiry is then opened to discuss these risks openly. HMRC also selects businesses at random, so it is important to be prepared.

Placing the onus on businesses

HMRC’s access to third party information has increased, but there has also been a shift towards placing the onus on businesses to assess and monitor their own tax risk.

This strategy has largely focused on businesses that fall into HMRC’s Large Business group (broadly those with annual turnovers of more than £200 million). In 2020-21, large businesses accounted for 40% of the country’s tax revenue, totalling £240 billion. To encourage these businesses to assess and monitor their tax risks, various compliance regimes have been introduced over the past 15 years, namely:

• Tax Strategy;
• Business Risk Reviews;
• Senior Accounting Officer (“SAO”); and
• Uncertain Tax Treatment legislation.

HMRC’s vision is that all businesses will implement a tax risk management framework that is at the forefront of business decisions. The first step towards achieving this vision was the introduction of the Corporate Criminal Offence (“CCO”) in 2017 which applies to all businesses irrespective of size.

Does HMRC review a business’ tax risk management framework?

Yes. For large businesses the most obvious way HMRC reviews this is part of their Business Risk Review. The risk review criteria were expanded in October 2018 and, for the period 1 April 2020 to 31 March 2021, HMRC categorised 69% of these businesses as medium or high risk.

For businesses outside the large business group, HMRC continues to identify opportunities for investigation and has increased its supply chain due diligence reviews. These not only test CCO compliance but also areas such as VAT compliance, IR35, national minimum wage and modern slavery.

What does a strong tax risk management framework look like?

A strong tax risk management framework should be bespoke and should consider the landscape in which the business operates, as well as self-generated risks due to size and complexity.

There are 3 key steps to strengthen a tax risk management framework, and this approach can be applied by businesses of all sizes: 

1. Assess – Undertake an initial assessment of the business’ tax risk and governance position.
2. Respond – Create a working action plan to reduce the level of risk in each area. Proportionate controls are implemented to reduce the level of risk without taking unnecessary time and effort.
3. Monitor – Review the risk framework regularly to ensure it continues to meet the business’ needs.

Key benefits of a strong tax risk management framework

• Risks are identified early – Controls can be implemented to monitor risk areas allowing actions to be taken sooner.
• Increases accuracy - Checks can be introduced to make sure tax returns and other filings are accurate.
• Demonstrates proactivity – HMRC consider businesses with proactive behaviours to be lower risk.
• Increased profitability – Placing focus on identifying risks and implementing controls early can ultimately reduce time and costs associated with dealing with inaccuracies and/or HMRC enquiries.
• Best practice – For small and medium sized businesses, creating a strong tax risk management framework now will put you in good stead as you grow and can help establish a trusted relationship with HMRC.

How we can help

We can work with you to deliver a bespoke and proportionate service that meets your business needs.

We offer a comprehensive service, which includes our tax dispute resolution specialists, to help minimise the risk of HMRC intervention into your business. As part of this, we support with compliance with key tax governance regimes, including but not limited to:

• The Corporate Criminal Offence
• Senior Accounting Officer
• Tax Strategy requirement
• Notification of Uncertain Tax Treatments
• Business Risk Reviews

We can also support with mapping your business risk and helping you build a strong tax risk and control framework that is bespoke to your business.

We offer a complimentary tax risk health check to assess how the business’ current tax risk management framework can be strengthened. If this is of interest, please get in touch with either:

Janaissa Eaglestone (janaissa.eaglestone@smithandwilliamson.com) or Clare Halligan (clare.halligan@smithandwilliamson.com).

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DISCLAIMER
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.