30 September is fast approaching!
As 30 September approaches, it is worth bearing in mind the current requirements with regard to the submission of SAO notifications and certificates. As a reminder, the 30 September deadline applies as follows:
For all other companies, those with an accounting period end date of 31 December 2013
- For PLCs, those with an accounting period end date of 31 March 2014,
The SAO provisions only apply to a qualifying company, as defined in HMRC’s SAO Guidance.
The company must notify the identity of its SAO to the Client Relationship Manager (CRM) in writing. This notification can be in any format (such as email). This requirement is an annual obligation, not only when there is a change of SAO.
Each SAO must send a certificate to state whether or not the company/companies had appropriate tax accounting arrangements throughout the period in question. If the company/companies did not have appropriate tax accounting arrangements it is the SAO’s responsibility to explain what the shortcomings were.
Please note: “hybrid” certificates that state that the tax accounting arrangements were appropriate, except for identified shortcomings or areas for improvement are no longer acceptable. Our update in April 2013 explains this further.
It should also be noted that the provision of a Certificate does not satisfy the requirement that the company should notify the identity of its SAO. The notification regarding the identity of SAO can no longer be provided on the same piece of paper as the certificate.
HMRC approach to business risk review
HMRC’s new ‘Large Business Directorate’ means that many businesses now have new Client Relationship Managers (CRMs) carrying out Business Risk Reviews. In some instances, these are building upon fairly superficial reviews that have taken place previously.
In these circumstances, it is worth revisiting HMRC’s Tax Compliance Risk Review Manual. It explains that – during such reviews – businesses are expected to show that they have clear governance and risk frameworks in place for managing tax. The manual states that while there is no single recommended corporate governance approach, HMRC sees the Committee of Sponsoring Organizations (COSO) framework as best practice. Indeed, it is notable that this framework appears to underpin the tax governance questionnaires that have been issued by a number of CRMs.
One objective of the COSO framework is to improve organisational performance and governance through establishing effective risk management and internal controls. HMRC expects good governance from the top of the organisation, plus an operational framework for implementation and finding plus managing risks.
The guidance is in line with HMRC’s recent drive to introduce more consistency and robustness in their approach to tax governance. CRMs are now expected to adopt a three key stage approach to the evaluation of the way that tax is managed:
Stage 1: Evaluating tax governance – HMRC wants to understand the governance framework within which the business manages tax compliance risk. They want to find out how this applies in practice by referring to some key business events. It should be noted here that whilst the guidance provides specific examples of such ‘events’, we have seen a number of other triggers that have led to a more detailed HMRC review. This includes the conclusion that previous business risk reviews were insufficiently robust. In particular, when revisiting previously awarded ‘low risk’ ratings, HMRC are asking businesses to evidence their tax governance framework.
Stage 2: Evaluating tax delivery - HMRC’s assessment of whether the processes and systems produce the right tax figures by reference to key risk areas; and
Stage 3: Audit testing – HMRC’s testing to confirm that the systems and processes are operating as designed. Such testing is stated to be exceptional but this does not accord with the experience of a number of clients.
What this means for the SAO certification process
SAOs must therefore ensure not only that they can articulate the tax governance framework within the business, but also that this translates into the way that tax is managed each day.
- The guidance focuses primarily upon the risk review process, highlighting how HMRC’s focus on tax governance extends beyond the relatively narrow confines of the SAO certification. However, it inevitably provides useful insight into HMRC’s expectations as to what constitutes ‘appropriate tax accounting arrangements’ for the purposes of the SAO regime.
HMRC updated SAO Guidance
HMRC has reworded the guidance for HMRC Customer Relationship Managers (CRM) (external link) when they come across late SAO notifications or certificates. The new wording explains that where CRMs believe there has been a late SAO notification or certificate, they must not issue a penalty or accept an excuse as reasonable without going through the standard authorisation process (external link).
This standard process involves seeking authorisation from HMRC’s ’Penalties Consistency Panel‘ which will consider whether a penalty is due or not. If the panel decide a penalty is due, CRMs must then secure approval from either a Director in the Revenue’s Large Business Directorate or an Assistant Director in Local Compliance to issue the penalty. The implication of the new guidance is that going forward CRMs cannot simply ignore SAO failures.
This update of the guidance coincides with HMRC’s appointment of 500 new CRMs as part of the creation of the new Large Business Directorate. These latest developments are in line with HMRC’s recent drive to introduce more consistency and robustness in its approach to tax governance.
In light of the more rigorous approach to the deadline reflected above, it is worth noting that 30 June is the deadline for the submissions of notifications and certificates for PLCs with a 31 December 2013 year end and other companies with a 30 September 2013 year end. Particular care should be taken to identify any PLCs within a privately owned group and to ensure that dormant companies are included.
HMRC last week updated its online SAO guidance. The key areas to note are:
1. There has been a significant increase in the level of internal procedural guidance on penalty charging for main duty failures or failures for inaccurate certificates. This includes appeal procedures and how to assess a penalty on a non-resident SAO.
We are not aware of previously-raised penalties for these failure types, but the guidance confirms our belief that HMRC intends to be more robust in future. This coincides with the recent HMRC restructuring, which should mean the same HMRC directorate deals with all SAO groups.
2. The guidance now clarifies that the company’s notification of the SAO’s identity should be provided separately from the SAO certificate.
Previous guidance suggested the notification and certificate could both be on the same piece of paper. This was as long as it included all relevant information and that it was clear the document was taking on two functions.
3. Clarification of the CRMs’ role, specifically that they are not expected to monitor certification dates for groups. However, any missed deadlines should be taken into account in the general risk review of the group.
4. New guidance on the steps that CRMs are expected to take when the SAO’s identity is not known to them before the statutory deadline. The guidance suggests that the CRM should find out who the SAO was and discuss the failure with them in more detail plus how it could affect the group’s risk rating.
5. The guidelines advise that any departures from the statutory position, e. g in relation to submission dates, must be approved at a very senior level within HMRC. This seemingly suggests a desire to introduce more consistency and to move away from the relaxed approach that has been adopted by some inspectors previously
Impact of HMRC restructuring
HMRC restructured last week, and created a new Large Business Directorate for UK companies and groups with turnover of more than £200m (estimated at around 2,000).
This replaces the Large Business Service (LBS) which dealt with UK companies and groups with turnovers in excess of £600m. It also takes the place of Local Compliance – Large & Complex (LC L&C) which included UK companies and groups with turnover between £200m and £600m.
We believe the reason behind the new directorate’s creation is to provide greater consistency of treatment, particularly in areas such as:
- HMRC risk reviews
- Senior Accounting Officer discussions
- risk ratings
- decisions on issues to be taken up for enquiry
Previously, there has been concern that businesses at the top-end of LC L&C in terms of size and complexity may have faced more HMRC scrutiny than bottom-end LBS businesses. This re-organisation by HMRC is intended to address that ‘cliff-edge’ issue.
As a result, we are currently seeing many changes in customer relationship management (CRMs). This could be a risk particular area where a business has had little (or no) contact with their CRM, and CRM change may bring a significantly different approach.
Is HMRC expanding its approach to tax governance?
There has been an interesting development recently which suggests that HMRC is beginning to expand its approach to tax governance. A number of our clients have received a targeted governance questionnaire as part of HMRC’s annual Business Risk Review (BRC). The questionnaire aims to identify the policies and procedures through which large businesses manage tax. This will clearly affect the business’s risk rating and illustrates HMRC’s expectations regarding what constitutes an appropriate tax control framework.
While it is still uncertain whether this approach will be introduced wholesale, the questionnaire shows that – in practice – HMRC is beginning to apply principles developed under SAO on a wider basis to encompass all tax risks, not just those covered by the SAO legislation. It means that HMRC expects large businesses to:
- be able to explain how they manage all their tax risks, not just those that fall within SAO
- have supporting documentation which demonstrates their overall business tax strategy
- have appropriate processes in place for the ongoing identification and management of tax risks
- monitor relevant policies and procedures to ensure that they remain fit for purpose and are implemented effectively
Groups should therefore consider whether their tax risk control frameworks are sufficiently robust to satisfy HMRC‘s apparent expectations.
Please email us if you would like to receive more information about this change in HMRC’s approach.
30 September is only a few days away!
For those of you with a 30 September 2013 deadline for filing your SAO certificate(s) please remember that:
The company should notify their CRM in writing who acted as the SAO. The Notification of the SAO can be in any format (such as an email). This requirement is an annual obligation, not only when there is a change in SAO.
Each SAO should send a certificate to say whether or not the company/companies had appropriate tax accounting arrangements in place. If the company/companies did not have appropriate tax accounting arrangements the SAO must explain what the shortcomings were. The SAO Certificate must be sent to the CRM as a signed hard copy to be received on or before 30 September but it would also be helpful if a copy of the certificate could be emailed to the CRM as well.
Please note that the provision of a Certificate does not constitute a Notification. The company’s notification may however be provided on the same piece of paper as the certificate but it must contain all the information required to constitute a proper Notification of SAO details as described in the legislation.
HMRC updated SAO Guidance
On Monday 5th August, HM Revenue & Customs (HMRC) released the long awaited updated Senior Accounting Officer (SAO) guidance. The proposed changes particularly impact what HMRC consider to be the appropriate wording for clean and qualified certificates (i.e. hybrid certificates are no longer considered acceptable). HMRC have also removed the phrase "to the best of my knowledge and belief". These changes place a far greater emphasis on materiality. The guidance at SAOG 14330 provides some useful commentary on 'accurately in all material respects'. Subject to some changes to the provisions around VAT Groups the new guidance will apply from the date of publication i.e. 5 August 2013.
SAOs should consider the following points in light of the changes to the guidance:
- How this new guidance will impact on certificates that need to be submiteed this year for prior periods. For example, the non plc's certificates for the year ended 31 December 2012 are due by 30 September 2013 - if they weren't submitted before 5th August the new guidance will apply;
- Whether areas of potential weakness identified on previous certificates have been addressed and rectified. If not, SAOs will need to consider what steps are now needed to address these and also assess whether they are material in the context of the current certification;
- Ensuring the process which is followed to assess materiality of potential weakness is evidenced to support any queries into the certificate at a later stage; and
- Considering whether it is appropriate to submit separate certificates for companies with qualifications and those without.
Increased spotlight on tax governance
Amidst all the recent news around tax avoidance and tax transparency the news that HMRC have engaged the services of two specialist tax governance experts may have escaped your notice.
The hires reflect an increased focus by HMRC on the recurring Business Risk Review and the need for companies to be able to articulate the existing tax governance framework they have in place. This involves not only reviewing operational policies and procedures around tax but also evidencing the ‘tone at the top’ of a company in its attitude towards tax risk and the degree to which this is being monitored on an ongoing basis. Obviously SAO forms an integral part of the business risk review but this additional focus on governance will add increased pressure on companies to demonstrate how SAO fits within the wider organisation and, more importantly, how detail in documentation actually occurs in practice.
Given the above, we expect HMRC to be more challenging in upcoming risk reviews.
In addition, the governance experts will also be responsible for providing training and support to CRMs around SAO and may be in attendance at HMRC meetings. It is expected that the degree of questioning around tax risk identification and monitoring will rise.
HMRC's response to SAO guidance consultation increases risk of main duty failure
HMRC has now released its response to the updated SAO guidance consultation. While the response implies that the updated guidance will generally be in line with the draft released for consultation, there have been a few changes that increase the risk of HMRC challenging companies on their compliance with the main duty.
HMRC has taken a firm approach on the issue of "hybrid" certificates (which state that tax accounting arrangements were appropriate except in certain circumstances), emphasising that they will not be considered acceptable under the updated guidance.
HMRC will remove the phrase "to the best of my knowledge and belief" from the certificate wording contained in the guidance, and has asked that SAOs of groups file separate certificates for those companies with qualifications and those without.
The renewed focus on a legal entity basis, together with no "hybrid" certificates and the removal of the phrase "to the best of my knowledge and belief" will increase the risk of HMRC challenging SAOs on their compliance with the main duty, and will place greater emphasis on businesses to determine what "in all material respects" means for their companies.
The updated guidance will apply from the date it is published, which HMRC expects to be "later in the spring/summer". If you are due to submit your SAO certificate in the next few months please be aware of the updated guidance so that you can give consideration to the impact of the changes on your SAO certification in anticipation of its release.
If you would like to receive a copy of HMRC's full response to the consultation or the draft updated guidance sections please email us.
HMRC Revised Guidance and Materiality Workshop
Representations around the proposed new guidance have now been submitted and HMRC has indicated they will aim to provide a response to issues raised by the end of March. They have confirmed that until the revised guidance is issued companies and SAOs may follow the existing guidance for the wording of their certificates.
If you would like a copy of the representations made by KPMG in the UK please email us.
With the proposed changes placing an increased focus on the concept of materiality for SAO, if you would be interested in attending an informal working session with your peers to discuss this important area on Tuesday 19 March 2013 at our Salisbury Square office please email us.
Revised SAO guidance opened to consultation
HMRC has released its proposed changes to the Senior Accounting Officer (SAO) guidance for consultation.
As expected, the changes are intended to give greater clarity over some of the areas of uncertainty, in particular:
- Reinforcing HMRC’s interpretation of the rules that SAOs must certify that tax accounting arrangements are either appropriate or not appropriate, with no middle ground (SAOG15200, SAOG15300, SAOG15400)
- Clarifying HMRC’s expectations of a person who becomes SAO during a financial year, or after a financial year but before the deadline for filing the certificate (SAOG15200)
- The level of detail which should be disclosed on a certificate, including HMRC’s expectation to see the root cause of the issue identified (SAOG15400)
These changes are likely to have a significant impact on how you approach your SAO compliance, with an increased focus on determining those tax accounting arrangements which are “material”.
HMRC has requested comments by 6th March. In light of this we will be hosting two sessions of our interactive SAO Forum:
- 14th February 9-10am – To discuss what these changes will mean in practice
- 26th February 9-10am – To collate and discuss the comments you would like us to take back to HMRC
Invitations for the 14th February Forum will go out to all subscribers to the SAO Tax Diary and previous attendees of the SAO Forum shortly. If you are interested in joining the Forum and have not received an invitation by Tuesday 12th February, please email email@example.com. Please also email firstname.lastname@example.org if you would like to request a copy of the consultation document.
HMRC’s central policy team recently shared with us two of the key areas of change in its proposed updated SAO Guidance. They confirmed that the changes would not seek to alter the existing rules, but aim to give greater clarity over some of the areas of uncertainty. Specifically, the two areas they mentioned were (i) the wording for qualified certificates and (ii) the need to understand the root cause of an issue.
Wording for qualified certificates
HMRC is concerned that qualified certificates are not written in line with the SAO Guidance (SAOG15200 and SAOG15400) which requires SAOs to state that “the company/ companies did not have appropriate tax accounting arrangements” when submitting a qualified certificate. Understandably a number of SAOs have preferred to word their certificate to the effect that the tax accounting arrangements were appropriate with the exception of certain identified areas. This is especially the case where the qualification(s) have been relatively minor. We understand that HMRC is seeking to reinforce their interpretation of the rules that SAO’s must certify that tax accounting arrangements are either appropriate or not appropriate; there is no middle ground.
Understanding the root cause of an issue
HMRC has identified a significant trend that the explanation around qualifications does not sufficiently set out the root cause of the issue, and instead is merely a summary of the error. HMRC is keen to ensure that the company has identified the root cause and that the remediation activity is appropriate to ensure the same error does not reoccur.
If SAOs follow the guidance (and there is no stipulation in the legislation over the wording of the certificate), an increasingly critical consideration will be the point of materiality for what is or is not relevant for the certificate.
HMRC confirmed that they are seeking to release updated guidance on the Senior Accounting Officer rules in the near future. We will share our insights as to what we understand the updates are likely to address in the new year and engage with you further when the updated guidance is released (no publication date has been confirmed).
In the meantime, Merry Christmas and have a wonderful New Year.
Following the recent Public Accounts Committee meeting to examine the Taxation of Multinational Corporations and recent treasury announcements about the tax affairs of Government suppliers, the amount of tax paid is under increasing scrutiny. At KPMG we believe greater tax transparency is inevitable going forward and now is the right time to get on the front foot.
My colleagues and I have written to many CFOs in the last few days to highlight this perspective and offer to meet and discuss the KPMG Framework on Tax Transparency. We also discussed the matter with the Financial Times and were pleased with the story published today “Big companies set to divulge tax details”.
As you may know, certain companies, plus the extraction industry as a whole, represent good examples of how businesses can use the concept of Tax Transparency to their advantage. Rather than allowing a misleading and misguided focus on corporate tax, these organisations educate customers, shareholders, Governments and the general public on the total tax paid, plus other non-tax investments that deliver wider economic benefit.
As we enter the results season, the attention on this topic looks set to increase. We are being asked to help clients prepare to answer questions about their tax payments, structures and policy. As a result, KPMG has developed a Tax Transparency framework to answer five key questions:
- How much tax are you paying and where are you paying it?
- How do you compare to your sector peers and wider industry?
- What is the wider economic benefit delivered by your business?
- Can you provide assurance that any tax planning undertaken (current or historical) could be explained satisfactorily to tax authorities, wider Government, customers or the press?
- What is your communications approach to tax?
With the above questions in mind, I will be hosting a web briefing on 4th December at 1400 and would be delighted if you could join me to discuss the topic of Tax Transparency and the framework that KPMG has developed.
To register for the web briefing (or if you would rather arrange a meeting), please email email@example.com.
We look forward to welcoming you to the web briefing.
KPMG UK Head of Tax and Pensions
Recent stories in the press over the amount of tax multinationals pay in local jurisdictions has reignited the debate over tax planning and the extent to which companies contribute to the countries within which they operate.
There is an increasing appetite for companies to disclose payments to governments under the new transparency agenda and, indeed, the Dodd Frank rules in the US and the Transparency Directive in the EU may well make this mandatory for listed and large companies within certain industries.
Senior Accounting Officer legislation in the UK introduced increased oversight over a company's tax affairs and transparency could enhance the requirement to disclose further details of a company's tax affairs; only this week there was a call by a member of the all-party parliamentary group on business, finance and accountancy for big businesses to publish the total amount of corporation tax paid to HMRC each year.
Whether a company wishes to voluntarily disclose details of its tax contribution (and a number already do) in the light of public scrutiny or are forced to do so by law, there is undoubtedly a perceived need of being able to articulate a company's tax philosophy to a wider group of stakeholders.
If you would like to contribute further to the ongoing debate on this new agenda and the impact it may have for companies and tax functions of the future, and more immediately from an SAO perspective, please feel free to contact me with your views and opinions.
We are seeing increasing evidence of HMRC adopting a sterner stance over late filing of Senior Accounting Officer certificates. Under the existing regulations, a failure to notify and provide a certificate by the due date is likely to result in penalties being levied on both the company and the SAO personally.
Interestingly, Customer Relationship Managers appear to be using late filing as an opportunity to engage with CFOs on a wider basis and asking questions around levels of SAO training and guidance within an organisation and not just on why the certificate and notification were not submitted on time (and whether this might constitute a reasonable excuse).
A recent KPMG WebEx indicated that 66% of attendees had qualified certificates filed by the end of September 2012. With the 31 December filing date (and the holiday season) fast approaching, limited companies with a March year end and plc’s with a June year end should ensure that sufficient time is allowed for discussion around qualifications and to allow certificates to be filed and acknowledged by HMRC well before the submission date.
KPMG have developed a model ‘SAO timeline’, setting out the timing of various SAO compliance activities and how these interact during a certification period. Given HMRC’s enhanced focus on late filing, this is something SAOs should clearly be aware of before signing their certificate .
On the face of it, CFCs (Controlled Foreign Companies) are not qualifying companies for Senior Accounting Officer purposes; however there are issues for SAOs to bear in mind when discharging their responsibilities.
The main area of focus for SAOs will be in respect of the accuracy of the apportionment of a CFC's profits to a UK subsidiary (that is within scope for SAO purposes). Typically, overseas entities operate beyond the central management’s direct oversight and hence reflect an area of greater risk.
It is therefore important to ensure that there are appropriate accounting arrangements within the CFC. With the increased attention Customer Relationship Managers (CRMs) are being asked to give SAO, SAOs should be prepared for their CRM to ask how they have managed compliance with the CFC regulations.
If you have recently submitted a qualified certificate for your 2011 year end, and have yet to remediate and embed the revised accounting arrangements, you are potentially at risk of being in the situation of having to submit a qualified certificate in respect of 2012.
But more importantly, because the SAO requirements apply throughout the year, a company with a 31 December year end for example, could end up in the situation where an issue relating to 2011 also gives rise to a qualification on their certificate submitted in 2014! This is because the issue has not been wholly remediated before 1 January 2013. Such a situation would require careful messaging with both the SAO, if you are the head of tax, and your CRM.
Do you have a robust remediation programme with allocated change owners, which is being monitored to ensure progress against predetermined milestones? Will this deliver the changes before 2013? If you have any concerns regarding your remediation programme please do contact me or your client service team.
HMRC has recently published a “Senior Accounting Officer core script for CRMs (PDF 29 KB )” on its website that sets out key messages on SAO beyond the ‘light touch’ year. Please click on the quoted link to access it.
The script provides a concise framework for the CRMs (Customer Relationship Managers) to help them have purposeful discussions with SAO qualifying groups as part of their routine meetings. Some of the key points include:
- SAOs should discharge their responsibilities throughout the year, and not simply at the year-end;
- Having in place mechanisms for identifying, on an ongoing basis, the risks that might result in the tax returns not being accurate and ensuring processes and controls are in place for managing and monitoring these risks;
- SAOs should consider both likelihood and impact when evaluating tax risks, and on this basis make a judgment about the extent to which a risk needs to be mitigated, i.e. a formal tax risk appetite across all taxes within the business;
- HMRC expects CRMs to discuss with the SAO what they are doing to discharge their responsibilities as part of the Business Risk Review.
HMRC sees open and transparent discussions with large businesses about their tax accounting arrangements as key to the successful application of this measure.
Following the feedback from our most recent SAO Forum earlier this week, we will be repeating the 'open topic' online Q&A session at 9am on Tuesday 18 September 2012.
If you would like to join the "open topic" online Q&A session please register by emailing the SAO Tax Diary by Friday 14 September 2012.
The timing of this session is to assist those companies with a September deadline for submitting their certificates. The highlight coming out the previous session for us was that 66% of respondents voted “yes” when asked whether they had or were intending to submit a qualified certificate this year. We believe this and the results from other votes are valuable, so please let us know if there are any issues that you would be interested in being put to a vote, as well as any other questions by emailing SAO Tax Diary.
Many organisations feel they have sophisticated systems for recording and analysing their tangible fixed asset additions and believe these meet the SAO requirements. However, with the increased focus by HMRC on identifying and capturing tax risks for SAO purposes, our experience shows it can be beneficial to challenge this assumption.
Recent work with one of our clients has shown that simply having a sophisticated system may not address all your compliance issues. In this case, tangible fixed asset expenditure was being incorrectly allocated to various categories, which affected the tax treatment of the expenditure. This was in part due to the lack of knowledge and experience of the detailed tax rules by the individual involved.
As well as being a potential weakness for SAO purposes, this could actually be costing the organisation money in terms of not making the correct claims for tax relief.
It is therefore paramount that organisations not only have systems for recording and analysing their tangible fixed asset additions, but also that these are operated by staff with appropriate technical knowledge and are reviewed on a regular basis, not only for changes to tax law, but also for changes to the data input into the system.
We have recently been made aware that HMRC’s Penalties Consistency Panel have decided to levy two Senior Accounting Officer penalties on a single company.
The penalties have been raised for:
- failure to notify HMRC of the name of the SAO, chargeable on the company;
- and failure to provide a certificate to HMRC within the required time, chargeable on the SAO individually.
As far as we are aware these are the first penalties to be levied by HMRC, illustrating a change in approach. The decision to raise these penalties appears to be borne out of HMRC’s perception that the company is experiencing difficulties in the relationship between its finance and tax teams.
This highlights again the importance HMRC is placing on governance as part of a company’s tax accounting arrangements.
Following the success of our first interactive SAO Forum in July we will be repeating the 'open topic' online Q&A session with a panel of the KPMG Core SAO Team. The timing of this session is to assist those companies submitting certificates in September.
Participants will be able to discuss current issues including HMRC's increased focus on tax risk and regular ongoing monitoring outside of the 'light touch' first year.
Date: 9-10am Tuesday 4 September 2012.
If you are interested in joining the forum or attending the online Q&A session and have not yet received an invitation, please email firstname.lastname@example.org.
For those of you who were unable to attend the first session, the 'open topic' format of the WebEx is wholly reliant on your questions and we try to respond to questions on a first come first served basis, so please do submit your question in advance of the session by emailing the SAO Tax Diary by Friday 31 August 2012.