Large business tax strategy behaviour – a UK research study

transfer pricing 102On 22 July 2015, Her Majesty’s Revenue and Customs (HMRC – the United Kingdom’s counterpart to SARS) published a 35-page consultation document containing the results of research undertaken by a well-known London-based research organisation, entitled

Exploring Large Business Tax Strategy Behaviour

The study set out to gain an understanding of how large businesses develop and adjust their tax strategies. HMRC regards such knowledge as key to its effectiveness in improving compliance.

Overall aim of the research

The overall aim of the research was to understand what leads businesses to change their tax strategies, and how these decisions get made. The specific aims of the study were to –

  • identify the key factors that influence a large business’s tax strategy, both internal and external;
  • explore how such decisions get taken, what the levers for change are, and –
  • which factors are most influential in prompting change;
  • what the priorities and levers are within a business; and
  • whether certain influences are more important for certain types of businesses; and
  • compare UK-based and foreign multinational companies in the above respects, and their respective approaches to tax.

To this end, qualitative interviews were conducted with heads of tax, chief financial officers and others with strategic decision-making roles in thirty-five large businesses.

Commercial climate and appetite for tax schemes

Businesses that were canvassed in the study spoke of recent changes in the ‘commercial climate’ and of a reduced appetite for tax schemes, with these changes being driven by public, press and governmental scrutiny.

Influence of high-level decision-makers and organisational culture

High-level decision-makers and organisational culture were found to be key factors influencing the tax strategy of a business. The study revealed that, as tax becomes increasingly important for a business, influence in this regard shifts away from a business’s head of tax toward the CEO and the board of directors.

Businesses canvassed in the study described how culture and appetite for risk are set by the board in line with shareholder priorities, while in unincorporated businesses they are set in line with owner priorities. Corporate culture was perceived as being highly influential in the formulation of tax strategies, which was consequently reflective of the culture and values of senior management.

Spectrum of attitudes toward tax risk

Businesses with a greater risk appetite tended to view tax as a straightforward cost or risk which could be monitored and shaped. Businesses with a lower risk appetite saw tax as part of their identity and regarded tax strategy as linked to their corporate social responsibility policy and as critical to their reputation.

Different levers influenced the tax strategies of businesses with varying risk appetites. Businesses that were calculated risk takers were more reactive to regulation and penalties. Those that were more risk-averse tended to be more responsive to public pressure, regulation and the views of HMRC.

Drivers of change in tax strategy

Culture and principles were found to be the key drivers in businesses where tax strategy was determined by an equilibrium between opposing forces. Changes in leadership, regulation and public scrutiny were regarded as having the potential to transform and alter the tax strategy of a business.

Importance of codification of tax strategy

The degree of codification and the articulated tax strategy in a company’s policy documents were revealed to be indicators of the degree of its tax aggressiveness. Businesses with a greater inclination to take fiscal risks tended not to have written or published tax strategies, while those with a lower risk appetite tended to have more formalised strategies.

Shareholder value and operating profit vs tax policy

Businesses emphasised that their main priority was to maintain and grow shareholder value and operating profit. Tax issues compete against these strong drivers.

Two contrasting perspectives

Two distinct perspectives emerged from the study. Tax was either treated as a cost or risk that could be altered like any other part of the business, or else it was viewed as key to the business’s identity, reputation and long-term value.

Businesses that treated tax as a straightforward cost or risk generally did not view their tax obligation as having a moral component, seeing it instead as a legal necessity. Their focus was on compliance and on not paying more than the minimum required by law – an approach which they assumed to be the norm amongst all businesses. They were also much more likely to have effective tax rate (ETR) targets which were communicated internally.

Their corporate goals often referred to efficiency and commitment to delivering value, and they felt that it was normal and justifiable for businesses to attempt to minimise their tax burden.

At the other end of the spectrum, some businesses saw tax as part of their identity. Here, tax was linked to corporate social responsibility policy and seen as being critical to the business’s reputation. Whilst this was occasionally strengthened by a moral or ethical imperative, it was primarily a long-term strategy to safeguard sustainable shareholder value and defend the business’s identity.

Influences on business culture in matters of tax

Businesses canvassed in the study described how the personal views and employment history of key decision-makers impacted on their tax strategy. The individual standpoints of the CEO, the CFO and, to a lesser extent, the head of tax were an important influence on the manner in which the business at large approached its tax dimension.

In businesses with a higher risk appetite, decision-makers had often previously worked at very aggressive firms or at one of the larger accounting firms, and this seemed to encourage risk-taking behaviour. In businesses with a lower risk appetite, the key decision-makers tended not to view tax issues as a cost centre to be managed in relation to internal goals.

Individuals with professional backgrounds in countries with restrictive tax regimes seemed to be highly responsive to the threat of penalties, and this led to their advocating a more cautious approach. Businesses in this category described this lower-risk type of culture as being concerned with good corporate citizenship, a desire to be seen to adhere to the spirit of the law, and an organisational approach to risk that considered compliance to be a long-term strategy.

The role of the nature of the business

Businesses with an appetite for higher risk tended to be operating in more competitive markets with more volatile profit margins, and commercial pressures were used to justify a more aggressive tax strategy.

Overview of external influences

The culture of the board was subject to a range of external influences.

A prominent external influence for businesses with a low appetite for risk was the advice and actions of the tax-collecting authorities. Such businesses placed a high value on their reputation with HMRC and sought to maintain a trusted status. HMRC’s risk reviews and inspections could have an influence on guiding their tax strategy.

Lower-risk businesses used advisors and agents primarily for reasons of compliance, the handling of returns and having the value of an external, independent and objective opinion to reassure the business that they had ‘got things right’. Where advisors came to these businesses with ideas for more aggressive tax schemes, the lack of appetite at board level meant that their ideas in this regard were turned down.

Such businesses tended to have a conservative client base, with minimal risk appetite – for example, government departments, pensioners or the consumer public.

Factors that could potentially influence tax strategy

Besides a change in leadership, four particular factors were identified that could potentially influence decision-makers and result in a change to a business’s tax strategy:

  • The introduction of harsher penalties;
  • A change in market conditions;
  • An increase in public scrutiny; and
  • A large-scale merger or acquisition that could create new structural opportunities for tax efficiency.

Overall, the study concludes that it is internal changes – in leadership and structure – that have the greatest potential for directly influencing a business’s tax strategy. External influences could effect change, but they do so by influencing and constraining a business’s key decision-makers.

Codification and content of tax strategies

Key findings in this regard were as follows:

  • The degree of codification of a tax strategy was a clear indicator of aggressiveness. Businesses with a higher risk appetite tended to leave their strategies unwritten and tacit. A more formalised and detailed written strategy, on the other hand, was more common in businesses with a lower appetite for risk.
  • Highly codified and formalised tax strategies included granular detail about how the business would behave in relation to particular taxes, outlining who was responsible and who was accountable, and setting out reporting structures that demonstrate compliance.

Businesses that perceived themselves as having an extremely low appetite for risk felt no need to formalise their tax strategy.

Where a business had a codified tax strategy, the language used in the strategy document could be a good indicator of risk appetite. Businesses with a greater appetite for risk referred to ‘compliance’ and ‘transparency’ to try to demonstrate that they were operating within the law, but such businesses also made clear their intention to minimise their tax within legal limits.

By contrast, businesses that were keener to demonstrate responsibility had a different tone to their codified tax strategy. Their strategies were described as seeking to ‘pay a fair share’ or explicitly stated that the business would ‘not be aggressive’, and they emphasised that their overall goal was not simply to be ‘compliant’ and ‘legal’, but to act within ‘the spirit of the law’. Such businesses often expressed a desire to maintain a ‘positive relationship’ with HMRC and other tax authorities.


The research demonstrated the power of organisational culture, and the influence of senior decision-makers in setting a business’s culture and determining its tax strategy and appetite for risk. Changes to management and leadership, for example a new CEO or majority shareholder, were seen as potentially the most transformational factor – both for overall strategy and, specifically, for tax strategy.

Competitor practices were influential, either through the Big Four accounting firms sharing information on what businesses’ competitors were doing, or where public scrutiny was driving up standards within sectors.

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