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HMRC internal manual

Tax Compliance Risk Management

The Business Risk Review (BRR): Business Risk Review Assessment indicators: Deciding whether a customer is Low Risk

Classifying a business as Low Risk represents a significant turning point in HMRC’s approach to a particular customer. As such, CRMs’ decisions need to be as transparent and consistent as possible and to be supported by evidence which will withstand external scrutiny. We have therefore provided examples below of what Low Risk behaviour might look like in practice for each of the BRR behavioural criteria. In order to be regarded as Low Risk, the customer must not fail any of the BRR behavioural criteria in any material respect. The phrase ‘in any material respect’ is taken from Senior Accounting Officer legislation and recognises that in large groups absolute perfection is not attainable. There will be cases where a customer does not meet one or more of the criteria but the failure is unlikely to indicate any significant or ongoing risk. For example, a customer may have made a relatively small error in one regime but, if this is unlikely to re-occur because they have put in place controls to prevent it or it was entirely unforeseeable, then the CRM may reasonably decide that, overall, for that particular criterion, the customer can be regarded as meeting it.

 

Low Risk Criteria

 

1. Governance

 

1.1 The customer is open with HMRC in real time about how they manage tax compliance risk across all relevant taxes and duties.

What this might mean in practice:

The customer:

  • Readily discusses with HMRC how they identify and manage tax compliance risk;
  • They respond co-operatively to reasonable requests from HMRC to demonstrate how this risk management works in practice;
  • The customer volunteers information in real time about significant commercial transactions or complex issues which might affect tax compliance.

     

1.2 The customer raises significant compliance issues, uncertainties and/or irregularities with HMRC in real time.

What this might mean in practice:

  • In general, ‘real time’ in this context can be regarded as at the time that a tax uncertainty or irregularity arises or a complex commercial transaction is being considered rather than after the return is submitted. CRMs will need to make a common-sense judgment about whether or not their customer has involved them in discussions at the appropriate time to provide a view on the issue, taking account of the fact that commercial pressures may require customers to move quickly on a particular transaction.

     

1.3 The customer promptly provides full, accurate and helpful answers to HMRC queries.

What this might mean in practice:

  • The CRM has not had to send repeated reminders or ask supplementary questions to obtain a full response (assuming the original request was well-articulated);
  • The customer provides ready access to relevant business personnel to discuss issues;
  • The customer uses different ways of helping the CRM understand an issue rather than just answering questions in writing.

     

1.4 The customer is aware of their obligations across all taxes and duties, seeks assistance as necessary and provides appropriate resources to deal with those obligations.

What this might mean in practice:

The customer:

  • Demonstrates the level of tax awareness and knowledge expected for their level of inherent risk;
  • Seeks advice from third parties on those areas where they do not have internal knowledge or experience;
  • Plans their resources to respond to reasonable requests for information from HMRC within reasonable timescales;
  • Actively contributes to CRM action plans and provides reasonable resources to ensure that milestones are met.

     

1.5 The customer has clear accountabilities up to and including the Board for the management of tax compliance risk and tax planning.

What this might mean in practice:

The customer can:

  • Clearly explain how tax issues are escalated appropriately up the organisation and how the Board has a line of sight on tax compliance risk and tax planning;
  • Demonstrate how this has successfully worked in practice in the context of significant business events which potentially impact on tax.

 
 

2. Delivery

 

2.1 The customer has a history of accurate and timely returns, declarations, claims and payments across all relevant taxes and duties.

What this might mean in practice:

  • Returns and payments are always made on time and are correct in all material respects. ‘In all material respects’ recognises that within complex organisations it is not possible to ‘de-risk’ systems completely and errors will inevitably occur. CRMs will need to make a judgment as to whether the customer has taken reasonable steps to ensure that returns are accurate.
  • Where significant errors have been made they do not point to systemic problems that the customer is failing to address;
  • HMRC interventions have not yielded any significant amounts of incorrectly declared or claimed tax.

     

2.2 The customer has appropriate tax accounting arrangements in place.

What this might mean in practice:

  • Tax accounting arrangements are defined as the processes the customer has in place to enable the tax liabilities to be correctly calculated in all material respects. They include the framework of responsibilities, policies, people and procedures in place for managing tax compliance risk and the systems and processes which put this framework into practice. They cover the end-to-end process from initial data input to the accounting systems to arriving at the numbers which form the basis for completion of the tax return. HMRC’s guidance on the Senior Accounting Officer measure provides further information on what appropriate tax accounting arrangements might include.

 

 

3. Tax Strategy

 

3.1 The customer is not involved in tax planning other than that which supports genuine commercial activity.

What this might mean in practice:

  • It may not be clear whether tax planning supports genuine commercial activity so ultimately it will be for the CRM to make a judgment, supported by advice from the relevant specialists. If planning is subject to the disclosure regime this should generally be treated as an indication that it does not support genuine commercial activity. However, if the CRM is satisfied that the planning does support genuine commercial activity or, since disclosure, HMRC has accepted the proposed tax treatment, then the fact of its disclosure can be ignored for the purposes of deciding whether this criterion is met. Conversely, where such planning is not subject to the disclosure regime, this does not necessarily mean that it supports genuine commercial activity.

     

3.2 The customer does not structure transactions in a way which gives a tax result contrary to the intentions of Parliament.

What this might mean in practice:

  • Normally it will be clear whether a transaction gives a tax result ‘contrary to the intentions of Parliament’ but ultimately this will involve a degree of judgment by the CRM, informed by advice from specialist colleagues. In cases of doubt, if the transaction is subject to the disclosure regime then this should be treated as an indication that its tax result is likely to be contrary to the intentions of Parliament.

     

What this might mean in practice:

  • In many cases it will be clear whether a transaction involves innovative interpretation of tax law but ultimately this will involve a degree of judgment by the CRM, informed by advice from specialist colleagues.

     

3.4 The customer is not involved with illicit trades.

What this might mean in practice:

  • Direct involvement in illicit trades and/or practices which do not comply with other UK legislation such as national minimum wage and labour provider legislation will preclude the customer from meeting this criterion. Other, less direct forms of involvement may also preclude a customer from being Low Risk. For example, where a form of illicit trade is well-known and has been subject of discussion between the customer and HMRC, the customer will be expected to have considered how they can help minimise the risk to the tax system and to implement reasonable measures where appropriate.
     

 

 

Low Risk Criteria for banks

In addition to the above a bank which falls under the Banking Code of Practice must adopt and implement the Code properly to be regarded as Low Risk. A Business Risk Review template which covers compliance with the Code is available for use with banking customers.