Legislation will be introduced in Finance Bill 2009 (expected on 30 April 2009) to ensure that accounting systems in operation within large UK tax paying groups are adequate for the purposes of accurate tax reporting (ie tax returns and supporting computations).
The measure
Senior accounting officers (likely to be the Finance Director) of such companies will be required to:
- take reasonable steps to establish and monitor accounting systems within their companies that are adequate for the purposes of accurate tax reporting;
- certify annually to HMRC that the accounting systems in operation are adequate for the purposes of accurate tax reporting; or
- specify the nature of any inadequacies and confirm that those inadequacies have been notified to the company auditors.
A penalty chargeable directly on the Senior Accounting Officer
will be introduced for a failure to meet the obligations. This
could be up to £5,000. This will be in addition to penalties
imposed on the company, although the precise operation of these
penalties has not been explained in any detail.
It is expected that the certification provided by the senior
accounting officer will be similar to that required of SEC
registrants under the US 2002 Sarbanes-Oxley Act - ie that
management have established and are maintaining an adequate
internal control structure and procedures for tax reporting. The
critical test will therefore not be whether the tax return contains
any inaccuracies, but whether sufficient controls were in place to
enable accurate tax reporting.
Who will be affected?
The proposition is that this measure would apply to large
companies, large groups of companies (effectively companies other
than those defined as 'small' and 'medium sized' in
the Companies Act 2006), and their senior accounting
officers.
This would mean companies that satisfy at least 2 out of the
following 3 criteria:
- Turnover, more than £22.8 million
- Balance sheet total, more than £11.4 million
- Employees, more than 250.
When?
These obligations will apply only to returns due to be made for accounting reference periods beginning on or after the date that Finance Bill 2009 receives Royal Assent which is expected by 21 July 2009. However, there may be transitional arrangements included in the Finance Bill.
Our view
We are surprised to see the introduction of this proposal as it
has not been the subject of any consultation and it appears
inconsistent with recent communications from HMRC regarding their
approach to assessing the quality of taxpayers' systems as part
of the risk-based approach.
Our fundamental concern is that it appears to impose a significant
new compliance burden on businesses, as well as presenting a
potential personal exposure for the Senior Accounting Officer,
while at the same time remaining silent on the hurdle of what is
'adequate' in this context.
We are uncertain as to the existing capability of HMRC to assess
the adequacy of accounting systems in this context, particularly
for corporate taxes where HMRC has only very recently begun to
formulate its expectations for the purposes of the risk-based
approach and penalty regime. Even in the context of indirect taxes,
where an evaluation of systems has formed a central part of the
assessment process for a number of years, this is likely to present
a resourcing challenge
It is also questionable how relevant the Sarbanes-Oxley
('SOX') experience should be here as the US legislation was
developed specifically in relation to financial reporting and so
arguably does not extend to the tax return preparation process.
Reference is made by HMRC to 'certain corporate tax governance
controls... to produce accurate tax computations' which appears
to extend beyond the scope of SOX. It is possible that this could
even extend to requirements for general ledger codes to be further
categorised for tax than is currently done by the majority of large
companies. SOX also focuses on group reporting whereas tax returns
are prepared from entity financial statements which may be prepared
under a different set of accounting standards (UK GAAP in the
majority of cases). It is likely that there will be consultation
with large companies on how this would work in practice.
SOX also operates under the concept of materiality as it is a
financial reporting requirement. There is currently no similar
concept of materiality in tax return preparation. As a consequence
of importing a SOX-based approach, HMRC may now therefore be
introducing the concept of materiality into their assessment of a
tax return although it is not clear whether this would be
equivalent to auditing materiality or whether a new concept of tax
materiality will have to be introduced.
HMRC are expecting that this measure will raise an additional
£140 million of exchequer receipts over 4 years from around
60,000 companies. We believe that the impact is likely to be closer
to neutral given that many companies do not currently have
sufficiently high data quality to support tax deductions. These new
requirements may lead to further deductions becoming available from
the improvement in data quality.
HMRC do not view these measures as imposing any significant
additional burden on companies where 'adequate accounting
systems' are already in place. However, we would expect the
reality (in line with the US experience) to be that considerable
additional work will need to be undertaken in relation to
documentation of processes, assessment and benchmarking of risks
and the adequacy of controls and the implementation of remediation
plans as well as potential changes to the set up of accounting
systems including general ledger code set up. There may also be an
impact on the division of roles and responsibilities for tax within
business where currently the signatory of the tax return is more
likely to be the Head of Tax than the Senior Accounting
Officer.
The personal responsibility aspect of these measures is very
surprising and will no doubt be unwelcome to those concerned. As it
is not expected that the operation of the controls will be required
to be externally audited, the 'self reporting' of
inadequacies puts an additional responsibility on the company and
it is likely that there will be significant additional internal
procedures and documentation required in order to report the Senior
Accounting Officer's certification.
Overall we believe this will have wide reaching implications for
companies and individuals which will need considerable focus over
the coming months.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.