London, 1st September 2009
Traditionally, corporate tax and finance departments should have adopted the goal of ensuring that they are achieving "best practice" in managing their various tax obligations. With the announcement of the new "Senior Accounting Officer" (SAO) measures, the Government has now seen fit to impose a legislative onus on large company SAO's to personally certify that they have taken "reasonable steps" to establish and then maintain appropriate tax accounting arrangements. Experienced international tax professional, Andrew Taylor, explores these issues in more detail.
Who does SAO apply to?
Broadly, the new SAO rules will apply to UK incorporated companies with a consolidated turnover in excess of £200m or a total balance sheet of more than £2bn.
The SAO is a director or officer with overall responsibility, as appropriately delegated, for the company's financial accounting arrangements.
The obligations imposed by the legislation apply in relation to financial years beginning on or after 21st July 2009 (being the date of Royal Assent for the new rules).
The scope of responsibility extends beyond just direct company taxes to include VAT and PAYE, amongst a range of other taxes.
What are the consequences?
Failure to comply with the duties imposed under the legislation can expose SAO's to individual fines of £5,000 and up to £10,000 per year. There may also be broader repercussions beyond the stigma and personal financial cost to the SAO of being fined, in that it might cause the HMRC to place greater scrutiny on a company's tax affairs, with the consequential cost of time and resource in managing this.
It is also uncertain how a company's auditors might react as, depending on the size of the inherent tax risk, they may see fit to qualify a company's accounts or at least note the issue in their audit report. This would elevate the breach to the attention of the company's shareholders with potentially adverse consequences for the company's senior management.
What can SAO's do to manage their responsibilities under this legislation?
In recent guidance the HMRC have issued, they suggest the following actions might be a suitable starting point, depending on the individual circumstances:
- Ensuring there is a process for gathering and recording data in a systematic way;
- Making sure that the key tax compliance risks and issues in the business are properly understood;
- Designing and implementing control activities to mitigate these risks, for example separation of responsibilities and ensuring that people who undertake delegated activities have the right levels of skill and competency;
- Putting in place mechanisms for communicating roles and responsibilities; and
- Setting up monitoring activities to ensure that controls are operating effectively. The level of monitoring required will vary according to the level of risk present.
A logical first step for companies would be to undertake an overall risk assessment and evaluation of how their existing tax and accounting systems are operating. (This might be an important first action to demonstrate that "reasonable steps" have been taken).
Based on the results of this exercise the SAO and the company's senior management might then define their expectations for how their overall tax and accounting functions should be optimally set up to address these risks. Any gaps in the current system will then need to be addressed.
It is also suggested that one "best practice" way to help reduce the risks of misreporting taxes is to significantly involve a company's tax team or external advisers in the annual budgeting and forecasting processes. This will ensure that they are well briefed on any transactions or new initiatives well in advance so they have time to review them, and can then monitor the tax outcomes as they occur through the financial year.
Experience suggests that involving the tax team in signing off the tax treatment of each relevant transaction as it occurs rather than delaying their involvement until the year end accounts and tax returns are being prepared can make a significant difference in minimising the risk of getting it wrong. (This is particularly relevant if a company is relying on external advisers to prepare its returns).
More detailed guidance on the HMRC's interpretation of the new rules can be found at: http://www.hmrc.gov.uk/largecompanies/duties-sen-acc-officer.pdf
How will this impact on the recruitment of tax professionals?
Rob Stephenson, Managing Partner at Maven Partners believes that companies subject to the SAO rules may look to bring tax resource in house for the first time. Tax process and procedures will be higher up the boardroom agenda. It makes sense from a commercial and risk management perspective to hire in an experienced professional to work with the external advisors. Furthermore we may see an increase in demand from larger companies for interim tax professionals with a tax process engineering skill set to help ensure that best practice is being adopted.
Andrew Taylor has over 16 years international tax experience having previously worked in the in-house tax departments of GE Real Estate and the Westfield Group in the UK and Australia, having begun his international tax career with Arthur Andersen and KPMG.
Rob Stephenson is a Founder and Managing Partner of Maven Partners, a specialist taxation recruitment business. For more information please contact Rob on 0207 061 6421 or email@example.com