Accounting
Personal liability of senior accounting officers |
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| Accounting | |
| Written by Tom Custance and Evie Meleagros, Fox Williams LLP | |
| Monday, 22 June 2009 | |
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Part 1: A look at the law surrounding the new personal liability changes.
Introduction
What is the objective?The Government’s intention with these proposals is to ensure that companies’ accounting systems are adequate to produce accurate tax returns and to highlight to companies where improvement is needed in their systems. The aim is to reduce misreporting of tax liabilities by catching the problem at the roots. The Bill sets out the new duties of senior accounting officers (“SAO”). But who is the “senior accounting officer”? This is the director or officer of the company who has overall responsibility for the company’s financial accounting arrangements. In most companies, this is going to be the Finance Director. It is also important to note that these proposals will only apply to SAOs of “large companies”. This is defined as a company which does not qualify as “small” or “medium-sized” under the Companies Act 2006. The Bill also excludes any company, which would otherwise be defined as a “large company”, if it is part of a group of companies where the parent is also a “large company”. Accordingly, there will only need to be one SAO per group. Under the Companies Act 2006, a “company” is essentially a company incorporated in the UK as it is described as one that is formed and registered under the Companies Acts. Therefore, non-UK companies are currently not bound by the new proposals. It is also reported that HMRC have confirmed that “company” is meant in the strictest sense, so it is not intended to include other types of quasi-corporate entities, such as LLPs. What are the proposals?1. The SAO must take “reasonable steps” to ensure that the company and each of its subsidiaries establishes and maintains “appropriate” tax accounting arrangements. The SAO must take “reasonable steps” to monitor these accounting arrangements and to identify any respects in which those arrangements are not “appropriate”. 2. If the company does not have “appropriate” arrangements in place, he must provide a report to the company’s auditors explaining why they are not “appropriate”. 3. The SAO must provide HMRC with a certificate (type A to certify “appropriate” arrangements or type B if there are areas in which the arrangements are not “appropriate”) for each financial year. If the SAO is found to have failed to comply with any of the above duties, he is personally liable for a penalty of £5,000 per duty. This means the SAO could potentially face a total fine of £15,000 in one financial year. The company itself also has a duty to notify HMRC of the names of each person who was its SAO at any time during the financial year. The company is liable to a fine of £5,000 if it fails to notify HMRC of the name of its SAO(s). The duties are intended to apply to tax returns for financial years starting on or after the date the Bill receives Royal Assent. This will most likely be in July 2009. What do these duties mean for a SAO?The SAO has to take “reasonable steps” to establish, maintain and monitor “appropriate” arrangements. What is “reasonable”? The term is a firm favourite in the legal world and has been used for centuries, the meaning of which can vary depending on the context. Here, it is likely that “reasonable” will apply an objective standard expected of a SAO, taking into consideration all the circumstances, including common practice within the company, other responsibilities the SAO holds and available resources. It is not requiring a SAO to go over and above the expectations of the role, but it is likely to demand a standard accepted as industry practice. The SAO will need to be able to show HMRC what steps he has taken to implement the arrangements to justify their reasonableness, if they are ever queried. Part 2 of this article will provide some suggestions on how to prepare for such a situation. “Appropriate arrangements” may cause a bit more of a stir amongst SAOs. The Bill provides that the arrangements must be such that they enable the tax liability of the company to be calculated “accurately”. This could potentially be a high threshold to meet, and without any guidance on its meaning, it may leave the SAOs very little margin for error. However, given that the duties apply a “reasonable” test, it is likely that HMRC will be entitled to expect calculations which are correct in all material respects but not 100% accurate. HMRC says the proposals draw on Sarbanes-Oxley, which in the US, according to HMRC, has led to indirect benefits of enhanced shareholder and customer confidence. It is unclear whether HMRC envisage that US law will have any influence on decisions made under the Bill’s provisions. Sarbanes-Oxley was introduced to more strictly regulate US public companies’ auditors. The section of that Act which the Budget’s proposals have been compared to is section 404, which requires companies to disclose more about their internal financial controls and requires their external auditors to give opinions on those controls. This is not the same as the proposals introduced in the Budget, as they focus on ensuring that adequate accounting arrangements are in place in the first instance, rather than just creating transparency in accounting, and there are no duties imposed on auditors. It is questionable, therefore, whether Sarbanes-Oxley decisions will have any influence in the UK. It appears to be merely the principle of increasing regulation within the accounting world which makes the laws arguably similar. The lack of guidance published to date regarding these provisions is going to cause SAOs understandable concern, especially given that the Bill is less than a month away from becoming law. It is not only the SAOs who are going to be worried, it is also their companies. The practical considerations go much further than HMRC appear to have envisaged; companies and SAOs will need to give serious consideration to the financial, administrative, employment, insurance and reputational implications of these provisions. Such implications may do more damage than a £5,000-£15,000 fine. Part 2 of this article explores these implications further and considers whether these provisions will actually achieve HMRC’s desired effect. Part 2 will be published on Wednesday the 24th and will look at the practical considerations and recommendations.
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