Companies often view tax compliance as a strict legal necessity, but one that is also extremely time-consuming and which ultimately adds very little to the bottom line.
However, increasingly compliance is rising up the corporate agenda in terms of importance and significance as businesses and HM Revenue & Customs (HMRC) view accurate and transparent compliance procedures and reporting as vitally important to commercial success.
This is the view of Ernst & Young’s Midland tax leader Christine Oates, who says that businesses across the region are recognising that improper compliance – tax accounting, the tax return reporting process, and internal control deficiencies – can potentially have an adverse affect on their financial reputation and ultimately their profit margins.
“Historically, compliance has been viewed as the process driven element of tax accounting which, although necessary, is a legislative burden on the tax function,” she said. “This perception is now changing and tax directors and business leaders are recognising the important role compliance plays in the ultimate success of a business.”
Ms Oates says that businesses are now facing increasing pressures, both internally and externally, to improve and streamline their compliance procedures. “The complexity and sheer rate of legislative change in the UK makes compliance even more burdensome for business. The additional complexities of new compliance regimes and the ever changing landscape of the UK tax system will leave many internal tax departments struggling to meet the demands of their growing list of additional responsibilities.
“Adding further pressure on businesses, HMRC has introduced a new risk-based approach to compliance, and the analysis of organisations’ systems and processes will be a key component of the assessment process.
“Organisations given a ‘high risk’ rating can expect regular interventions from HMRC which will cost time and resource to resolve.”
Added to this, HMRC’s more stringent approach to the operation of the penalties regime can lead to heavy financial penalties for those organisations which fall short of robust tax compliance.
“Companies are also facing pressures brought about by the credit crunch, with companies looking at every aspect of their business to reduce internal costs. With these added pressures, effective and streamlined compliance procedures are being viewed as increasingly important.”
In response to this demand, Ernst & Young’s Birmingham office has a team of dedicated compliance specialists, led by Emma Keen and Emily Grycuk.
Ms Keen said: “To meet these complexities and external challenges, organisations are asking for greater efficiency and a more global perspective from their compliance providers.
“However, problems arise when compliance providers are not able to meet the challenges, whether it is through lack of services, technical expertise, people resource or global reach and perspective demanded by many international clients.”
Underlining the significance of compliance and businesses increasing reliance on compliance providers, a recent report from Ernst & Young indicated that over 35.7 per cent of an internal tax function’s time is spent on routine compliance.
Ms Grycuk, a newly promoted manager, added: “Many tax advisors do not recognise that to manage large scale compliance engagements, they need specialists who offer flexible and agile services to cope with the demanding nature of the work.
"As pressure increases to get compliance right, businesses should be closely examining the level of investment made in technology, processes and people by their providers, to determine how well prepared they are to respond to market pressures.
“Although compliance maybe a necessary and relatively routine part of tax accounting, many organisations are now recognising that a robust, well integrated compliance relationship with their provider will be the cornerstone of their success.”