The Senior Accounting Officer certification process announced in the Chancellor’s Budget marked a significant step in the Government’s attempts to increase personal and corporate accountability for tax matters.
Supported with the threat of stiff financial penalties, and the prospect of it coming into force by as soon as July, businesses need to plan for the legislation’s implementation as a priority.
The proposed legislation will place a personal obligation on a director or officer of a large UK company – a “senior accounting officer” (SAO) – to nail their colours to the mast on the quality and fitness for purpose of their organisation’s tax accounting arrangements on which the figures and information in all taxation returns made by a company are based.
For these purposes, companies are viewed as “large” in size if they meet two of the following criteria: they have more than 250 employees; they have a turnover in excess of £22.8million, or they have balance-sheet assets in excess of £11.4million.
As drafted at the moment, the SAO will be given two choices. If it can be certified that the “arrangements” in place enable the taxes and duties payable to be calculated accurately, a “Type A” certificate must be submitted. If it cannot, a “Type B” certificate should be submitted detailing what the shortcomings are and confirming that an explanation has been provided to the company’s auditors.
The new system is designed to drive tax compliance further up the agenda of corporate governance so that it is not solely an issue for the finance department.
The hope is that, by placing a personal obligation on a very senior individual within a company, there will be a trickle-down effect across the business which will help to ensure that the internal systems are robust and accurate for taxation purposes.
HM Revenue & Customs (HMRC) has, however, stressed that it sees a distinction between arrangements which are sufficient for audit purposes and arrangements that allow for accurate returning of taxation liabilities.
Significantly, the legislation relates to returns for all taxes for which the board of HMRC has responsibility. This will cover not only corporation tax and VAT, but also petroleum revenue tax, PAYE, stamp duty land tax, the Construction Industry Scheme and numerous other less mainstream taxes which are highly significant in certain businesses.
It is expected that the legislation will come into effect by as soon as mid-July, once the Finance Bill has received royal assent. This would mean that for a company with a financial year-end of July 31, 2009, all returns submitted after August 1, 2009, would be within the new regime.
As such, planning for the new regulations will need to become a priority for many businesses to ensure that their internal systems are up to scratch. HMRC has been at pains to point out that it does not want the implementation of the SAO certification process to place a huge additional compliance burden on companies.
It foresees a “light touch” approach rather than the major accounting and systems engineering exercises that had to be carried out to comply with SOX 404. However, from Ernst & Young’s experience, it is likely that HMRC will have high expectations about the accuracy and level of sophistication to be found in the systems used by exploration and production (E&P) companies in the oil&gas sector.
Although HMRC is hopeful that most companies’ current accounting arrangements will already be adequate, or in need of minimal refinements, this could be an over-optimistic expectation.
The draft legislation requires the SAO to ensure that the company and all of its subsidiaries have “appropriate arrangements” in place, and then to take reasonable steps to monitor those arrangements on an ongoing basis and identify any respects in which they are not “appropriate”.
As the obligation to provide a certificate is an annually recurring one, there will be ongoing work for the SAO.
Many companies where, up until now, the board has left tax compliance in the hands of its tax department may also need to seek additional comfort before signing a document that could potentially result in stiff penalties.
In addition to a fixed SAO and company penalties, failures where the organisation has not taken “reasonable care” may also bring the company into the standard tax-geared penalty regime.
It is also important to note that the certificate must be in HMRC’s hands by no later than the date on which the company’s accounts are due to be lodged with Companies House. This will invariably be before some of the tax returns for that year have been finalised and submitted.
There are two steps that companies can be take in response to the proposed legislation. There is currently a continuing dialogue between the business community and HMRC to help to shape the final legislation and guidance, so companies should consider how they wish to influence the debate.
Taking an early opportunity to highlight what may be the unintended effects of the legislation before it becomes law may lead to an alteration and refinement of the rules that companies will ultimately have to comply with.
Corporates also need to consider what changes will need to be made to their organisation in order to prepare for the legislation coming into effect. This may entail a critical examination of the arrangements that are currently in place, or may provide an opportunity to explore how current systems can be improved to benefit the business as much as enabling compliance to the new regulations.
Either way, businesses will need to assess these issues sooner rather than later, or seek the help of professional advisers.
Derek Leith is head of tax at Ernst & Young in Scotland