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