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HMRC Told To Focus On High Corporate Tax Risks

by Jason Gorringe,, London

26 July 2007

While HM Revenue and Customs has made progress in changing the way it deals with corporation tax for the largest businesses in the UK, there are ways in which it can improve, particularly by focusing on higher amounts of tax at risk, according to a report released on Wednesday by the public sector watchdog, the National Audit Office (NAO).

This was the main finding in a report to Parliament which recognised that large businesses are an important part of the economy, and that the largest 700 businesses paid GBP23.8 billion in corporation tax in 2006-07. However, it also recognised that dealing with corporation tax for large businesses is complex because most are multinational companies, the tax legislation is complex and businesses are entitled to plan their tax affairs to minimise their tax liabilities within the rules.

The report observed that HMRC has adopted a new approach to improve the way it works with large businesses, and to create incentives for businesses to reduce their levels of tax at risk. It has appointed client relationship managers for each large business, and has begun to reduce the number of long running enquiries, giving businesses greater certainty over their Corporation Tax liabilities. It has a more structured approach to risk assessment and it has begun a programme where HMRC senior management engage directly with management boards of businesses which pose higher risks.

However, the report points out that the department could better direct its efforts on higher value risks and progress enquiries more quickly.In February 2007, it was carrying out 4,700 enquiries but nearly 1,700 were five years old or more, and 58% of its open enquiries were expected to produce less than one per cent of the total additional tax yield generated from compliance activities.

The NAO said that implementing the new approach successfully depends on engaging frontline staff to achieve a change in culture, moving away from the traditional practice of opening enquiries whenever tax is at risk, and working with businesses and their advisers to achieve a more collaborative approach. It also involves developing the skills and training of staff to build their expertise on more complex tax matters and on the businesses with which they deal. The department should also develop a broader set of performance measures to assess the impact of its work, it added.

Sir John Bourn, head of the NAO, commented: "Large businesses are a significant contributor to the UK economy. The recommendations in my report will help the Department manage the risks to Corporation Tax revenues more effectively and work more collaboratively with large businesses. The Department should embed cultural and behavioural changes in the everyday practice of its staff to achieve these aims."

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