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HMRC Approach to Compliance Risk Management

In a published paper today, HMRC Approach to Compliance Risk Management for Large Businesses, HMRC sets out in more detail its approach to compliance risk management for large businesses. The paper describes what is meant by tax risk and the criteria and information used to assess it, the process by which the risk assessments will be conducted and, how, in future, HMRC will vary its activities more clearly to respond to risk which will significantly reduce the number of enquiries for low risk businesses and increasing the intensity and effectiveness of interventions for high risk businesses.

HMRC are expanding the scope of their risk assessment reviews. In addition to large businesses that are managed by the Large Business Service (LBS), all other large businesses that are dealt with primarily by the Large and Complex Group of HMRC’s Local Compliance, will expect to see a similar risk-based review approach (being developed over the next 18 months) to be applied to them in the future. A risk-based approach will also be applied to employer compliance reviews.

In the risk reviews, HMRC will be principally concerned with ‘compliance risk’. They have highlighted specific factors that they believe will create risk in a tax system. These include external drivers such as globalisation, corporate tax strategies, complexity in corporate structures, systems and processes, and gaps in HMRC’s ability to understand companies’ businesses and decisions. A successful tax risk management system has been described as one that includes strong governance, clear and proper understanding of tax obligations, a culture of openness with the tax authorities, and robust systems and processes.

In the paper, the steps that HMRC will take in the risk review process are clearly explained and a copy of the summary template that will be used in the process has been included. Businesses with a low risk assessment should benefit from minimum intervention from HMRC except when there are changes in circumstances. A full risk process is expected to be repeated only every two to three years, if not longer. This approach to low risk businesses represents a significant change in the way that HMRC operates. For higher risk business, there will be at least an annual risk review with increased emphasis on significant risk, in particular, transactions that have little or no commercial substance and those that will result in low income falling within the UK tax net that is disproportionate to the economic activity taking place in the UK.

Our view
The paper has provided greater clarity and certainty on the HMRC’s approach to compliance tax risk management. Evidently, a more transparent and close working relationship with HMRC is encouraged as it will provide companies with greater certainty for complex tax transactions on a real time basis. Consistent with what is happening in other major economies, HMRC has also increased their emphasis on strong corporate governance and the need for robust systems and processes for tax compliance. In conclusion, given the clearly defined benefits of being categorised as a low risk business, large businesses should now start investing more heavily than ever before in ensuring that there is an effective risk management system in place. It is important, however, to bear in mind when documenting the risk processes and systems that sight of such documentation may be requested by HMRC.



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