Accounting officers: will the buck stop with you?

They might be perfectly competent in their role, but will senior accounting officers (SAOs) be reluctant to sign off risky tax planning schemes because the buck now stops with them when explaining the complex arrangements to the taxman?

Risk and internal audit experts certainly think so, as we enter the first full financial year the new rules effect.

The government wants to ensure large companies’ tax returns are accurate by having SAOs personally endorse the numbers, which will bring intricate tax schemes under the spotlight.

The SAO may very well be someone further down the food chain than the CFO. A UK-owned group or the UK parts of a foreign-owned group may have one or several SAOs depending on the structure and spread of responsibilities, the taxman has said.

In the SAO, the buck stops with whoever has “overall responsibility” for the accounting systems but this is not necessarily the tax expert familiar with the nuts and bolts of these arrangements.

Tax schemes, which cover everything from how a company shifts goods and services between different locations in transfer pricing to its overall tax bill, can be highly intricate and only truly understood by those in the tax department.

People entrusted with signing off the accounting systems may block risky tax schemes because they would be the ones to go into the minutiae with the taxman.

“Quite a lot of organisations have liked complex [tax] set-ups in the past but the onus is now on the senior accounting officer to explain them. That will cause some concern,” said Jonathan Wyatt, managing partner at Protiviti.

A careless or deliberate failure to comply with the new requirements will result in a penalty chargeable to the SAO personally, as well as the company.

Schedule 46 of the Finance Bill 2009 introduced requirements for SAOs of UK incorporated companies or divisions with a turnover of more than £200m, or a £2bn-plus balance sheet, reports the adequacy of their accounting systems in producing accurate tax returns to HMRC.

The issue also has global ramifications as well for schemes rolled out by a US parent, for example. If the parent company is non-UK incorporated, but has UK subsidiaries big enough to meet the turnover or asset tests, the divisional SAOs might have to try and understand schemes designed from across the Atlantic.

“There may be pressure from the group to implement a global scheme which the SAOs don’t understand,” Wyatt added.

PwC said since the publication of Finance Bill 2009 it had become clear through its discussions with HMRC the taxman was “surprised by the level of interest” generated by companies looking for clarification.

PwC experts said that SAOs would have to take reasonable steps to ensure that the company and each of its subsidiaries establishes and maintains appropriate tax accounting arrangements.

Any situations where the accounting arrangements could be judged to be inappropriate – ie. a tax scheme – would need to be justified.

“Only one type of certificate will be required, on which the SAO will either certify that the tax accounting arrangements are appropriate, or explain the respects in which those arrangements are not appropriate,” PwC said in its SAO guidance.

Despite teething problems HMRC has taken a tough line and said SAOs should be able to meet the requirements if the accounting systems and processes they were signing off were adequate.

In its SAO guidance, the taxman said all companies had an obligation to deliver correct and complete tax returns covering everything from business transactions through to computing the final tax liability. Therefore, systems would naturally need to be fit for purpose.

Given the size of qualifying companies, inadequate tax accounting arrangements could lead to the misreporting of liabilities amounting to very sizeable amounts, the taxman warned.

“Many of these [qualifying companies] will already have robust tax accounting arrangements which we would expect to fulfil the requirements of the legislation and enable SAOs to be confident in certifying their appropriateness,” HMRC said.

“However, there are some qualifying companies which do not have robust systems and processes and which find it difficult to know whether or not the right amount of tax is being paid. This measure makes the SAO accountable for rectifying this.”

IN OUR VIEW

Senior accounting officers will have to be on their toes if they don’t want to find themselves the subject of a grilling from the taxman. Those working for companies which take an aggressive stance on tax planning may have to take a crash course to learn the intricacies of the schemes and explain why these schemes are above board. HMRC 1: Companies 0.

Further reading:

Accounting: The introduction of the senior accounting officer and what it means for FDs