Accounting
Personal liability of senior accounting officers: Part 2 |
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| Accounting | |
| Written by Tom Custance and Evie Meleagros, Fox Williams LLP | |
| Thursday, 25 June 2009 | |
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Personal liabilities of senior accounting officers - Part 2 - Practical considerations and recommendations.
Part 1 of this article looked at the provisions in the Finance Bill 2009 (“the Bill”) imposing new duties on senior accounting officers (“SAO”). What should a SAO do to ensure compliance?• Ensure you have suitable external support in place to provide advice and guidance when you need it, in particular, auditors and lawyers. HMRC is not unknown for its vagueness when it comes to its rules and regulations, but there are auditors and lawyers who are experienced in deciphering their meaning. • Consider the extent to which you can delegate these duties. This will not release you from the duties, but it means you will be less pressured to get everything done yourself. • It is a personal liability so think about it from a personal perspective. Document everything. Keep records of discussions, proposals for policies, minutes of meetings etc to demonstrate you have taken “reasonable steps” to implement and monitor the arrangements. • Despite it being a personal liability, companies are likely to foot the bill on behalf of the SAO. Therefore, ensure your employment contract does not prohibit the company from paying any penalty imposed in this context. What should a SAO do if HMRC assert that he is in breach of these provisions? • Obtain legal advice from a tax/finance lawyer and an employment lawyer. This is because not only are you likely to need advice for the company in respect of the accounting arrangements, but you may, unfortunately, need advice in a personal capacity on the risks the breach may cause to your employment. • Be aware that there is a right to appeal a decision under these provisions (paragraph 12, schedule 46). • It is possible that breaches of the duties may cause damage to your personal reputation. You should seek advice and discuss with your employer to try to minimise exposure so your career is not damaged unnecessarily. • Find out whether such a breach would be covered by your company’s insurance: while any fine imposed by HMRC will not be covered, there may be cover for the costs of investigating and defending HMRC’s allegations. Considerations for a company whose SAO has been held liable under these provisions• On the other side of the coin, the company needs to consider how it will deal with its SAO if he/she is held to have breached the provisions. It will need to strike a balance between the potential reputational damage to itself if it is not seen to take disciplinary action against the SAO, but at the same time, will not want to be seen internally (by its staff) as ‘abandoning’ a senior employee for what may have been an inadvertent error. • If the company intends to pay any penalty incurred on behalf of the SAO, consider what the company’s policy will be on this. Companies should not pay the penalty where the SAO’s breach of duty is grossly negligent, or fraudulent, or he/she deliberately concealed inadequate arrangements etc. Will these provisions achieve the desired effect?At the moment, there are more questions than answers. The first point is whether these provisions are necessary. Sections 386 and 387 of the Companies Act 2006 impose an obligation on companies to keep adequate accounting records, breach of which can result in imprisonment and/or a fine for “every officer of the company who is in default”. If the provisions are necessary, are they proportionate? HMRC claims that the duties under the new provisions are based on a similar duty of care to that applying to the declaration on a tax return. On that basis, HMRC states that the additional impact on compliance costs and administrative burdens will be negligible. In light of some of the considerations identified above, that seems unrealistically optimistic. The next question is whether the provisions will improve the accuracy of tax returns. It is predicted that any penalties incurred by the SAO are likely to be covered by the company. Not only will this take some of the pressure off SAOs, causing them to be less worried about breaching their obligations, but a likely maximum annual penalty of £15,000 for a large company is not going to cause any real pain. Further to this, by HMRC’s own admission, only just over 3% of all live incorporated companies (around 2 million) fall within the Companies Act 2006 definition of “large”. Is improvement in accounting arrangements within this 3% going to make a real difference to the exchequer? The industry’s biggest concern is that the provisions will stifle business. They may deter skilled people from the role of SAO, and parliamentary debate on the issue has highlighted concern that the provisions may impact on the British economy’s competitiveness. This is something the US allegedly experienced in the wake of Sarbanes-Oxley, where many companies de-listed from the US stock exchanges and came to Europe in an attempt to avoid the new restrictions. Given the chain of events that led to the current economic downturn, it is understandable why the Government is keen to tighten up regulation of the financial sector. However, the practical considerations of these new provisions do not appear to have been properly thought through. SAOs and companies should seek advice and be prepared as it is currently difficult to predict how strictly HMRC intend to police these new duties.
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