Questions Directors Should Be Asking When Evaluating Tax Planning Strategies

Tax planning is a crucial aspect of any successful business. While Directors aren't expected to be tax gurus, they do have a responsibility to ensure the company is managing its tax affairs effectively. This means asking the right questions and understanding the potential implications of different strategies.

Understanding Your Risk Tolerance

Not all tax-saving opportunities are created equal. Some involve complex structures or aggressive interpretations of tax laws. While these might offer significant savings, they also carry a higher risk of failure and penalties if challenged by the tax authorities in the courts.

A key question for directors is: How confident are we in the legality and supportability of this tax planning strategy? Don't be afraid to ask for a "reasonable arguable position" assessment from your tax advisors. This clarifies the strength of the strategy's legal foundation.

Balancing Short-Term Gains with Long-Term Goals

Tax planning shouldn't come at the expense of the company's long-term vision. Consider the following:

Impact on future transactions: Will a complex tax structure make acquisitions, mergers, or Initial Public Offerings (IPOs) more difficult down the line? Will it affect the balance sheet and the company’s creditworthiness?

Reputational risk: Are there ethical considerations surrounding the proposed tax strategy? Could it damage the company's reputation if made public?

Engaging with Your Advisors

An experienced and sensible tax specialist is an invaluable resource for Directors. Here are some additional questions to consider:

Tax implications of upcoming business decisions: What are the potential effects should we expand into new markets or make major investments?

Recent changes in tax legislation, case law or regulations: Is there anything current or upcoming that you should be aware of before taking concrete steps?

Handling day-to-day tax compliance: Is the business’s internal team well equipped to handle compliance?

Industry Benchmarks: Are there similar companies successfully utilising this strategy?

Full Disclosure: Does the tax plan involve any aggressive accounting practices or loopholes? Will there be full disclosure on the company’s Corporation Tax return?

Communication with Stakeholders: How will the tax strategy be communicated to shareholders, investors, and, if appropriate, the public?

By taking a proactive and sensible approach to tax planning and asking the right questions, Directors can ensure their company is optimising its tax position while minimising risks and maintaining a strong reputation. Remember, responsible tax planning is about finding a sustainable balance between minimising tax burden and adhering to legal and ethical principles.