Tax efficiency; managing the risk of interpretation

One of our primary roles, as advisers to our clients, is to assist them in being as tax efficient as possible. Below, Martin Gurney explains what tax efficiency is, the risks and rewards associated with its interpretation and how managing tax risk is an important part of business strategy which can significantly improve tax efficiency and cash flow.

Tax efficiency

What does this mean?

Well, in simple terms, it means: paying the minimum viable amount of tax; and/or deferring tax liabilities as long as possible; without acting contrary to the law; and without exposing the client to a risk above and beyond the level of risk that is acceptable to them.

There is, and has always been, risk in tax.  The reason for this is that there are frequently circumstances that do not readily fit within the legislation and which therefore require interpretation.  The risk is that H M Revenue & Customs (HMRC) does not agree with the interpretation taken – potentially leading to additional tax liabilities, interest on late paid tax, and penalties for incorrect submissions.

So what is our approach to this? 

Firstly, and most fundamentally, we need to be able to identify that a risk exists, which in turn relies upon us having been provided with all of the relevant facts and circumstances surrounding a particular transaction.  Once a risk is identified, we then need to assess:

• The potential interpretations and their tax consequences
• The risks and rewards associated with each such interpretation
• The client’s attitude to such risks
• What actions, if any, may be taken to mitigate the risks
• Whether there is a mechanism to agree the interpretation with HMRC prior to making a return to HMRC in that respect
• How any chosen interpretation should be disclosed to HMRC to best protect the client’s interests

This last point is extremely important – failure to properly and adequately disclose the interpretation of a transaction to HMRC carries significant risk in itself.  We would never recommend such a course of action – it potentially both exposes you to increased penalties and increases the period during which HMRC can discover and challenge the interpretation of the transaction. 

Will HMRC scrutinise me?

There is a widely held belief that highlighting a transaction to HMRC will inevitably result in increased HMRC scrutiny.  In fact, my experience is exactly the opposite – we have successfully disclosed many transactions that require interpretation to HMRC without this leading to a tax enquiry, and most frequently with HMRC accepting the proposed treatment.  We have the experience and expertise to assist clients in obtaining the most appropriate treatment.

Summary

Managing tax risk is an important part of business strategy which can significantly improve tax efficiency and cash flow.  It is less usual for clients not to wish to take any risk and certainly this would most likely adversely impact tax efficiency.  By clearly identifying the risks and rewards, we help our clients navigate the intricacies of the UK tax system.

How can Haines Watts help?

We advise clients with a broad range of tax and compliance matters throughout the South West region.

If you would like to have a conversation to understand the complexities of the above, please get in touch with your usual Haines Watts contact.