UK Tax Departments Slow To React To Change, Says KPMG

by Robert Lee, Tax-News.com, London

16 November 2006

Tax departments in the United Kingdom have been slow to react to the increasing compliance burden brought about by the changing regulatory landscape, a study published yesterday by KPMG has concluded.

According to KPMG, its biennial survey: 'The tax function – facing up to a changing world' reveals a "startling" lack of understanding among tax professionals of a new approach by HM Revenue and Customs (HMRC).

Whilst four out of five respondents claimed to be aware of radical changes in the way in which HMRC is interacting with large businesses, less than half were willing to describe themselves as “fully understanding” the situation, KPMG said.

The survey also found "a surprising degree of comfort" around tax processes and controls, despite HMRC's identification of this area as an area of compliance which needs improving.

“Businesses need to appreciate that HMRC is increasingly focusing on the accuracy of the data and process used to compute tax calculations and perceives there to be significant potential for errors in this area," observed Sue Bonney, UK head of tax and people services at KPMG in the UK.

"Mistakes made in gathering information or failure to correctly categorise expenditure or revenue are forms of non-compliance and HMRC will seek to penalise corporates for transgressions in this area," she warned.

The survey found that most companies are unhappy with their tax department’s work load being biased towards compliance, but have largely failed to put in place technological solutions which could reduce the more time-consuming compliance work.

However, when looking at processes and controls, respondents felt in general that the systems they employ to gather the complex data required to complete accurate and timely tax returns are robust and they do not perceive there to be a high level of risk in this area. However, KPMG questions whether this level of comfort is justified; only half the corporates questioned had a documented tax strategy, and examining the internal audit process revealed that in 85% of cases, the review process did not raise any concerns about tax.

The survey also suggests that HMRC’s crackdown on "unacceptable" tax avoidance is having an impact on tax departments’ strategies in the UK. Tax professionals describing their organisation’s attitude to tax planning as “aggressive” more than halved to just 11% compared to 23% in 2004. No respondents claimed to be “very” aggressive in the latest survey.

Nonetheless, tax as a board level issue appears to be declining. While the percentage of those stating that the ultimate responsibility for tax risk lies with the board has risen from 9% in 2004 to 23% this year, those “strongly agreeing” with this has declined 10% to 32% among all respondents, and from 50% to 22% among large companies in the same period.

Sue Bonney continued:

“The compliance burden is increasing from both a process and planning perspective. It is clear that some boards appreciate their responsibility in relation to tax governance, but many still seem not to."

She concluded that:

"The tax community needs to continue best efforts to articulate the risks and opportunities which exist around tax - whether that involves a clearly expressed tax strategy evaluated and endorsed by the board, or better processes and technology to manage compliance risk and free up time to get on with what they really want to be doing. Early adopters are showing what can be achieved and we expect others to follows.”

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