As published on: ey.com, Tuesday 15 August, 2023.
UK finance leaders expect incoming international regulatory reform and sustainability-related reporting rules to have a major impact on their organisation’s finance functions, according to the latest EY Tax and Finance Operations Survey (TFO).
The annual survey polled 1,600 CFOs, heads of tax and finance professionals across 32 jurisdictions, including 150 based in the UK.
The reporting period for global 15% minimum tax rate called for under the base erosion and profit shifting (BEPS) Pillar Two will come into effect in the UK from 31 December 2023. The survey found that 89% of UK finance leaders expect their tax planning and business operations to experience ‘moderate’ to ‘significant’ change once BEPS 2.0 is implemented.
However, readiness for this change is a key area of concern, with only 42% of UK respondents having completed a Pillar Two impact assessment at the time of completing the survey. The survey revealed that UK finance leaders are more prepared than global counterparts, with just 30% of finance leaders worldwide, and 33% across Europe, saying that their organisation has completed a Pillar Two impact assessment.
The UK legislation for Pillar Two was included in the recently enacted Finance (No. 2) Act 2023 and amendments have already been proposed for next year’s Finance Bill to keep the UK legislation in line with developments at an OECD level. The UK Government has committed to reporting on progress of the worldwide implementation of Pillar Two at the Chancellor’s 2023 Autumn Statement.
Meanwhile, 72% of UK respondents expect the incoming EU Carbon Border Adjustment Mechanism (CBAM) to have a significant impact on their organisation’s tax and finance function. The tax on imports of carbon-intensive products into the EU comes into effect later this year initially as a reporting obligation rather than a financial obligation. These reporting obligations fall on importers, with submission for the first reporting period due by 31 January 2024.
The UK Government is considering proposals to introduce a UK CBAM and a consultation on this, alongside wider measures to tackle carbon leakage, closed in June 2023.
Two in five (43%) UK finance leaders say they expect that new or emerging sustainability taxation requirements will have a significant impact on their organisation’s tax function. Recently introduced measures in this area include the Plastic Packaging Tax and the UK is currently considering and consulting on a range of other regulation to support a national Net Zero transition.
“UK finance teams are under substantial pressure as they contend with an unprecedent period of change across the domestic and global regulatory landscape. The initial BEPS reporting period begins in less than six months and, while UK companies are further ahead in preparations than their global counterparts, the majority still haven’t finished assessing how this impending change will affect their organisation. Businesses will need to adapt data sourcing, processes and controls to account for the new regime’s reporting and compliance requirements, and these preparations should be made as swiftly as possible.
“Finance teams are also planning for the green taxation being introduced by governments around the world to support national Net Zero transitions. These teams will need to prepare for individual incoming regimes, such as the EU CBAM, as well as a far broader evolution as companies disclose their own transition planning and progress. The modern finance function will need to understand how tax reporting fits into this new disclosure framework and how to translate sometimes abstract tax data into meaningful information for regulators, investors and the wider public.”
An increasingly complex regulatory environment is driving a growing number of businesses to adapt their operations, with 97% of UK respondents saying they are changing their tax and finance operating models, compared to 73% in 2018.
However, nearly half (47%) of UK finance leaders cite the lack of a sustainable plan for data and technology as the biggest barrier to achieving their vision for a transformed tax function.
Tax leaders are also reluctant to embrace emerging technologies like generative AI. Eighty-five per cent of respondents state that they do not believe generative AI tools will be a game-changer for their tax function within the next three years, suggesting that companies are yet to be convinced of how these new technologies will affect them.
Despite expecting incoming regulatory reform to have a significant effect on workload, the majority of UK tax and finance teams are also planning to tighten budgets over the next two years. More than two thirds (69%) of respondents say their organisation is planning to reduce its tax and finance function budget over the next 24 months, while 15% say they are planning to freeze budgets.
As costs and operating models come under review, organisations are more likely to consider partnering with a provider to co-source their finance function. The average likelihood that businesses would co-source selected tax and finance activities over a two-year period has risen from 87% in 2020 to 97% in 2023.
More than a third (36%) of UK tax functions are either already co-sourcing with a provider that has significant capabilities in data, technology and shared service centre delivery, or are considering doing so.
Three in five (61%) respondents say the ability to develop their team and provide opportunities to work on more strategic activities is the most significant benefit of partnering with a provider to co-source multi-country tax compliance and statutory reporting activities. Eighteen per cent identified cost savings as the most significant benefit of co-sourcing.
“UK businesses are significantly transforming their finance operating models as they continue to explore what the modern tax function looks like. This is driven by the evolving regulatory landscape and challenging economic conditions, with today’s finance leaders required to navigate the rising cost of capital, shifting workforce demographics, frozen or falling budgets and shareholder unrest, all while planning for growth. Co-sourcing is playing an increasingly significant role in the market as tax functions partner with providers to better harness emerging technology, tackle growing workload volumes, refocus in-house talent on more strategic tasks and demonstrate value to the wider business.”