The SAO legislation, introduced in 2009 to tackle the potential ‘accountability gap’ for tax, was another clear signalling of HMRC’s approach of moving from the historic ‘enquiry-only’ basis to ‘real-time’ working with tax payers. The legislation requires companies to nominate an SAO, who must take reasonable steps to establish and maintain ‘appropriate tax accounting arrangements’ to ensure that tax liabilities are accurately calculated in ‘all material respects’.
Those liabilities include most taxes payable by insurers - corporation tax, PAYE (but not NIC), VAT, IPT and stamp duty.
The SAO legislation defines qualifying companies as those with turnover in excess of £200m or a balance sheet greater than £2bn for the preceding year. Previous SAO guidance stated:
“... insurance companies do not normally show turnover on the face of the accounts and therefore the asset test alone will determine whether or not they are a qualifying company for the purposes of this legislation.”
So despite writing premiums greater than £200m, a number of insurance groups relied on this guidance and did not provide SAO certificates to HMRC. However, confusion did exist around how insurance groups with investment, service or broking entities should apply the guidance.
The notable change in the new guidance (which superseded previous guidance with immediate effect on its publication in April 2012) is that there is no longer any exemption for insurers. They are now required, notwithstanding that turnover is not described as such in their accounts, to apply the Companies Act definition of turnover, which is “amounts derived from the provision of goods and services falling within the company’s ordinary activities”, and apply the test accordingly.
Insurers that have been within the rules and have already provided certificates to HMRC should be aware that the ‘light touch’ approach initially adopted by HMRC will no longer apply. The SAO signing the certificate should be able to demonstrate that tax risks are properly understood, controlled and managed throughout a company, from the correct processing of an invoice up to the Board having an appropriate understanding of tax risk for the business as a whole.
Insurers should reassess whether they are within the SAO rules or are likely to shortly become within the rules.
Is so, they should assess their framework of responsibilities and whether they have appropriate people and procedures in place for managing tax compliance, as well as the systems and processes which put this framework into practice.
It should be noted that the SAO certificate must be provided to HMRC by the due date for filing of the company’s financial statements to Companies House, not the normal deadline for submission of the corporation tax return. SAO’s are personally exposed to penalties of £5,000 for failure to comply (or providing a deliberately inaccurate certificate).
KPMG can assist SAOs to prepare their certification and provide insightful benchmarks against peers, which will help facilitate discussion with internal stakeholders on the wider concept of tax risk and governance, something many groups are considering as part of their overall risk governance approach to the implementation of Solvency II. Common weaknesses identified include lack of monitoring and documented procedures, complications with in and out-bound employees, and tax not being integrated into the formal business risk assessment process.