In response to social pressure as well as regulatory and tax drivers, ESG issues are now mainstream for the business community. Travers Smith recognises that a strong ESG proposition can lead to higher value creation, and many businesses are taking an increasingly proactive stance towards meeting sustainability goals. Travers Smith's sustainable tax work covers advising on both responsible taxation – compliance with tax reporting and anti-avoidance regimes and being seen to do the "right thing" in relation to tax matters - and advising on tax aspects of environmentally friendly projects.
The last decade has seen a raft of new tax regimes – both international and domestic – aimed at increasing the amount of transparency and disclosure. Regimes such as US FATCA, the OECD's Common Reporting Standard and the country-by-country reporting rules require businesses to disclose information which is then shared between tax authorities on an international basis, to try and combat tax avoidance and tax evasion. Further developments such as multinational top-up tax (the UK implementation of Pillar Two of the OECD's anti base erosion and profit shifting plan) will likely result in businesses having to provide even more information. The last few years have seen an increased focus on the amount of substance in entities, from the introduction of substance rules in Jersey, Guernsey and the Isle of Man to EU proposals for minimum substance requirements in EU entities (ATAD 3). In addition to complying with tax disclosure and transparency regimes, businesses will need to consider whether they meet any applicable substance requirements and make sure that they are up to date on the latest measures.
The UK Government committed in June 2019 to bring net UK carbon emissions down to "net zero" by 2050; by its own admission at the time, one of the most ambitious targets in the world. The UK government has also committed to prevent all avoidable plastic waste by the end of 2042. To this end, a plastic packaging tax came into force in April 2022. The Government's stated strategy is to create "high-skill, high-wage, low-carbon jobs", and tax policy will play a key role in seeking to influence the momentous behavioural change required of both businesses and consumers to meet this ambition. All businesses will need to consider the impact of the significant and far-reaching fiscal changes expected in this area.
The UK tax legislative framework now contains a significant number of anti-avoidance regimes. In addition to targeted anti-avoidance measures there are wide-ranging provisions including the GAAR (general anti-abuse rule), extensive disclosure regimes including DOTAS, FATCA/CRS and DAC 6 (expected to be replaced with legislation implementing the OECD mandatory disclosure rules), and other tax compliance measures such as the requirement for large companies to publish a Tax Strategy, the senior accounting officer rules, HMRC's co-operative compliance framework and the code of practice on taxation for banks. A corporate criminal offence of failing to prevent the facilitation of tax evasion was introduced in 2017.
From April 2022, large businesses are required to notify HMRC of any uncertain tax positions taken by the business, i.e. those which are contrary to HMRC's known position, or those for which a provision has been made in the business' accounts.
An increasing number of regimes require information to be reported directly to HMRC and also, in some cases, to investors, investee companies, or financial institutions. Businesses must determine which transactions are reportable and how best to respond to requests for information. Failure to meet these reporting obligations carries the risk of reputational damage as a result of action taken by HMRC and increased press scrutiny.
The Government is increasing the number of HMRC compliance officers, so a corresponding increase in the number of enquiries into the compliance of businesses is to be expected. The government has also published draft rules, with the aim of expanding HMRC's information powers. For example, HMRC has indicated that it is currently investigating a number of businesses under the corporate criminal offence of failure to prevent the facilitation of tax evasion.
Some compliance regimes require businesses to take proactive steps to set out their approach towards tax avoidance, which enables them to highlight their sustainable credentials. Options to engage with HMRC at an early stage, including via customer compliance managers, can enable businesses to develop a more productive relationship with HMRC.
Developing a business-wide policy on taxation, ensuring a consistent approach from the ‘top down’, careful monitoring of compliance with all relevant reporting regimes and including appropriate provisions in contracts to allocate risk and responsibility in relation to tax matters all indicate best practice in this area. Where external advisors are taking the lead on compliance with reporting requirements, on transactions, for example, it is important to ensure advisers are coordinating with each other and adopting a consistent approach.
Businesses should consider the following key areas:
- maintaining an up to date risk assessment and appropriate policies and procedures to give the best possible defence to the corporate criminal offence and providing relevant training to all employees on tax compliance issues, at a level appropriate to their role and level of responsibility
- ensuring that the business has complied with all tax transparency and disclosure requirements, and considered any applicable minimum substance rules
- developing business plans and making contractual commitments in a way which factors in ethical tax trends, such as the potential impact of new green taxes on business models and sustainable growth strategies
Our Tax team provides support to corporates, investors, asset managers, funds and pension schemes on a wide range of ethical and sustainable tax matters, both in respect of specific transactions and also as part of a wider package of support to individual businesses. This work includes:
- market knowledge – we can provide insight on the latest market practice in this sensitive and ever-changing area, and support and advice on general tax compliance and HMRC’s latest thinking and consultations. We work with our clients at a strategic level in this area to help them develop a ‘top down’ approach to tax ethics
- advice – we provide tailored advice on applicable tax regimes and reporting requirements, for example, helping to formulate bespoke policies in relation to the corporate criminal offence of failure to prevent facilitation of tax evasion. We also advise on the allocation of risk and responsibility for tax compliance between parties and stakeholders in commercial transactions
- training – we offer training to clients across their organisations (at all levels) to understand the ‘top down’ approach to tax ethics, and the key regimes to be aware of
- policies – we can advise you on the content and strategic focus of your tax policy, taking account of current considerations and the likely shape of longer term tax regulation
- enquiries – we can advise you during all stages of an HMRC enquiry, from advising on responses to initial requests for information (including balancing data protection and other legal obligations), to drafting responses to HMRC correspondence
Examples of our work in this area include
- advising listed companies on setting up and operating hardship funds for their employees
- advising listed companies on the waiver of salary/bonus/directors’ fees in lieu of charitable donations
- advising an international organisation operating in the environment sector on certain tax matters on a pro bono basis
- advising businesses on tax responsibility and transparency
- advising investors and asset managers on their participation in the emerging voluntary carbon credits market
- advising a range of different clients including FTSE 100 companies on their policies and procedures to provide the best possible defence to any allegation of a failure to prevent the facilitation of tax evasion
- assisting several large businesses with the publication of their tax strategies
- pro bono work with the Chancery Lane Project on the tax side – the aim being to use legal solutions (through contractual and legislative drafting) to promote a greener tax system
- structuring investments into renewable energy projects and environmentally friendly transport systems