Customer Relationship Managers (CRMs) are continuing to take an inconsistent approach with companies on discussions over the obligations for Senior Accounting Officer (SAO) in terms of compliance measures and required documentation. What is unmistakable from discussions with HMRC and media reports, is that tough market conditions are placing considerable strain on HMRC (yields from Corporate Tax are down significantly) and it is responding with more focused interventions and targeted enquiries.
For those companies whose CRM still appears to be taking a ‘light touch’ approach to your affairs, it is important to note that CRMs can and do change. Therefore your approach to SAO should not be reliant on an informal and undocumented seal of approval from your existing CRM. With these obligations being placed personally on the SAO, it is important to have appropriate documentation in place to evidence that appropriate tax accounting arrangements were in place (for example, evidence of Board engagement; a tax risk register; controls testing results) with appropriate monitoring that supports your SAO certificate, whether that be a clean or a qualified certificate. We have seen CRMs apply for SAO penalties, but we understand that these are not currently being approved by HMRC’s SAO policy team.
We held the first of our SAO Forums (a Q&A WebEx) this morning and during one of our polls, over half of the participants said they didn't have a tax risk register.
The main duty of the Senior Accounting Officer legislation requires the SAO to take ‘reasonable steps’ to monitor a company’s tax accounting arrangements. It is therefore essential that SAOs apply a real time and ongoing approach to monitoring and not simply perform a year-end review prior to submitting their certificate.
Examples of what monitoring may entail in practice could include an annual review of the company’s tax risk appetite, quarterly reviews of the key tax risks, identification of new risks and periodic testing of key controls.
Initial feedback from KPMG’s SAO Diamond survey has highlighted monitoring as one of the common areas of weakness across all industries, together with the identification and assessment of tax risk. We are seeing HMRC increasingly asking SAOs questions around the framework they have for identifying tax risk and their degree of oversight over the effectiveness of mitigating controls. Crucially, one of the most common questions we have seen in the last few months are informal requests to see a company’s tax risk register.
As companies exit the ‘light touch’ first year of SAO, therefore, there will be a clear need to focus on ongoing monitoring and establishing formal frameworks around capturing and assessing tax risks.
We are pleased to announce the launch of the KPMG SAO forum, an interactive group designed to provide insight and experience on SAO regulatory matters.
With SAO certificates currently being prepared and filed, there are myriad issues to consider as the Senior Accounting Officer regulations move away from the initial ‘light touch’ year. In response, our first event will consist of an ‘open topic’ online Q&A session with members of the KPMG Core SAO Team. Participants will be able to discuss current issues including HMRC’s increased focus on tax risk and regular ongoing monitoring outside of year one.
Date: 9-10am Thursday 26 July
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.
Should you also wish to submit a question in advance of the session please email the above address with your query by Tuesday 24 July 2012.
One issue that generated significant discussion at our recent Tax Management Club breakfast revolved around the requirement to disclose potential SAO issues in respect of current and prior year certificates.
While there is no formal legal obligation to amend a prior year certificate in the light of new information, the Senior Accounting Officer Regulations do require SAOs to take ‘reasonable steps’ to inform HMRC once an inaccuracy has been discovered. In the absence of such a notification, HMRC considers a prior year certificate to include a careless inaccuracy, and as such, may impose a personal penalty on the SAO.
As non light touch year SAO certificates are being filed, therefore, it is imperative that any current year qualifications in a company’s tax accounting arrangements are considered in light of prior years to ensure prompt and appropriate disclosure is made to HMRC.
At our next Tax Management Club breakfast session we will be exploring the key issues around making disclosures to HM Revenue & Customs (HMRC). This will include looking at the strict legal position and also the many practical points that can arise when faced with actual or potential historical tax errors. Some of the questions that can arise in this troublesome area include:
- “We have discovered an error in a past tax return. What are my strict legal obligations?”
- “It’s not absolutely clear that there is a tax liability; what should I say to HMRC?”
- “Our work on SAO suggests we may have underpaid tax in earlier years; what should I do?”…
The session will include practical insights from our legal and tax investigations specialists; attendees will also have the opportunity to discuss topical issues with peers over breakfast.
Date: 8am – 9:45am Wednesday 13 June 2012
If you are interested in attending this event and have not yet received an invitation, please email email@example.com by Friday 8 June 2012 for further details.
Late last week, HMRC made some revisions to the wording of its new guidance largely in relation to its position on disclosures regarding SAO penalties or potential penalties. The revised wording confirms that the Customer Relationship Manager (HMRC) can discuss with the company/group the absence or lateness of a certificate, but they must not discuss whether or not they are considering raising, or have raised, a penalty on the SAO. Previously, the wording implied that a CRM must not raise any failure by the SAO with the company as to do so, would be a breach of confidentiality.
Following on from the release of HMRC’s SAO revised guidance, we have highlighted some of the key changes below:
- Banks and insurance companies who were previously exempt from the turnover test will now be within scope;
- References to ‘light touch’ for companies entering the regulations for the first time have been removed (except for those entities that are now caught by virtue of the revised guidance (and not simply because they newly qualify under the existing turnover and balance sheet tests) – please see the diary entry on 03/02/2012.
- Overseas activities of UK companies (not overseas subsidiaries) are now included within the purview of the regulations. This change is on the basis that wording from paragraph 23 (“Foreign branches of UK companies”) of the original guidance has been removed. During the consultation exercise prior to the release of the revised guidance, HMRC stated that they believed the previous guidance was incorrect in respect of the point that “companies are only within the SAO regime to the extent that they are operating in the UK”.
- A qualification is not necessarily evidence of an SAO failure and the inclusion of a non relevant issue on the Certificate should not be considered as an inaccuracy, unless it draws attention away from other failures or inaccuracies. A main duty failure could only be established through further discussion and review with the SAO;
- CRMs should only allow filing extensions under where there are extenuating circumstances (see SAOG15700 of the revised guidance) and these will be judged on a case by case basis. CRMs are instructed not to allow more time simply because an SAO wants to submit one certificate covering a number of group companies whose financial years or filing deadlines do not end on the same day.
- Companies and/or SAOs cannot absolve themselves from the duty for notifying or certifying to HMRC by simply incurring the penalty. Failure to provide the required information will be taken into account by the CRM in assessing the company(s) consideration of risk as part of HMRC’s Business Risk Review process; and
- SAO rules will apply where insolvency procedures are under way.
These developments, and the confirmation that there has been a significant shift in scrutiny from HMRC’s initial ‘light touch’ year demonstrate that SAOs need to be more engaged with their CRM, and have the appropriate documentation supporting the approach and procedures which have been implemented. In particular, there is an increasing focus by HMRC on the identification of key tax risks (and not just controls) and being able to monitor those risks on an ongoing basis during the course of a financial year rather than simply as part of an annual review prior to the submission of an SAO certificate.
HMRC has today published the revised SAO Guidance.
Check back soon to see our commentary on the revised guidance, and what it means for you.
We are pleased to confirm that Michael O’Callaghan and Carol Gray from HM Revenue and Customs’ (HMRC) Large Business Service will be participating in our upcoming WebEx. They will be speaking to provide us with insight on HMRC’s expectations for year two, and their internal training programme which is currently being rolled out across their Customer Relationship Manager (‘CRM’) network. We have also been informed that the revised SAO guidance is scheduled to be released on 25th April.
If you are interested in attending this event, and have not yet received an invitation, please email firstname.lastname@example.org for further details.
Following the “light touch” approach to the first year’s certificates, SAOs should now be able to demonstrate that tax risks are properly understood, controlled and managed. HMRC’s revised guidance on SAO is expected to be published shortly and many organisations are now gearing up for submitting their second SAO certificate(s). In light of these and other recent developments we will be hosting an SAO WebEx on Thursday 26 April 2012 to cover the following:
- Key emerging differences following the initial ‘light touch’ year
- Latest findings and experiences of clients (e.g. the certification process and challenges from HMRC)
- Disclosing deficiencies after having previously submitted clean year 1 certificate(s)
- What are HMRC’s expectations?
- How should a business manage its SAO obligations – what does ‘good’ look like?
- KPMG’s “SAO Diamond” Benchmarking Survey
If you are interested in attending this event please email email@example.com for further details.
HMRC has recently announced a governance protocol over communication and escalation procedures where it has concerns over a Bank’s compliance with its commitments under the existing Code of Practice on Taxation for Banks.
Such escalation procedures include:
- Compliance issues being raised at the earliest opportunity with the Bank where HMRC have identified significant concerns
- Where such concerns cannot be resolved by the CRM, issues will be escalated to the Bank’s Board for further discussion
- If the Bank is ultimately deemed to be non compliant, HMRC would expect the Bank to acknowledge this fact in public announcements it makes on the operation of the Code
HMRC have indicated their expectations under the Code in three main areas: “Governance”, “Tax Planning” and the “Relationship between the Bank and HMRC”. Under each heading, HMRC outline a number of reasons as to why concerns could be raised, ranging from a lack of a formal governance and risk management framework; a lack of transparency in tax planning and in dealings with HMRC; through to a failure to provide an SAO certificate under schedule 46 FA 2009.
The protocol is aligned with HMRC’s objectives for SAO and is indicative of an increasing trend at HMRC to ensure that governance processes around tax are dealt with at Board level. The further expectation of a public disclosure, for non compliance with the Code, also adds to the reputational risk for a Bank and reinforces the requirement of maintaining a level of transparency in all its tax affairs.
A full copy of the protocol can be viewed by following the link below:
HMRC Governance Protocol on compliance with the Code of Practice on Taxation for Banks (PDF 56KB)
Lately we have started to see a number of instances where SAOs have subsequently identified weaknesses in their tax accounting arrangements that were not previously identified in the certificates they had submitted to HMRC. These weaknesses have stemmed from a variety of reasons including inadequate change management protocols (e.g. ensuring the correct tax treatment for new contracts); a lack of a robust risk identification process in ‘Year 1’; and insufficient monitoring over tax planning schemes.
These past certificates are therefore inaccurate in light of these newly identified weaknesses. An inaccuracy in a certificate that was neither careless nor deliberate when the certificate was given, could be treated as careless by HRMC (and the SAO liable to a penalty), if it can be shown that the SAO discovered the inaccuracy and did not take reasonable steps to inform HMRC. We recommend that the SAO fully understands the underlying reason for the error and that alongside the corrected certificate, there is a considered process regarding the way that it is communicated to HMRC.
SAOs, therefore, need to be mindful of their obligations throughout the accounting period and to consider whether the breakdown relates to past as well as current accounting periods. If the former, action may be needed in respect of correcting past SAO certificates. It is not simply sufficient for SAOs to focus on their obligations in the few weeks leading up to the submission of their next certificate.
A number of the budget measures announced last week will have a direct impact on the calculation of tax liabilities covered in the Senior Accounting Officer legislation. Therefore, SAOs should ensure their accounting arrangements have the capacity to monitor and adapt to the changing tax environment.
Although there was no specific reference to the Senior Accounting Officer legislation, we believe the revised guidance on SAO is due to be released around the second week of April.
KPMG recently met with HMRC’s SAO Policy Team. During the meeting it emerged that HMRC will be providing Customer Relationship Managers (“CRMs”) with additional SAO training which should be completed before the end of May.
The training will be in order to roll out the revised guidance on the SAO Regulations that will likely be published during the second week of April.
The training should help to address some of the variations in approach that we have seen across the CRM population and we hope that, going forward, SAOs will experience greater consistency in the approach the CRMs take.
In response to the increasing level of direct SAO engagement by CRMs, KPMG recommends that SAOs fully prepare in advance of these meetings so that they are fully equipped to respond to such questions.
What happens when there is a change in SAO either during the accounting period,or after the accounting period but prior to the filing of the SAO certificate?
The outgoing SAO may be liable to a penalty even after leaving the position and the incoming SAO may be reluctant to certify for the period in which they were not the SAO.
A formal and robust change management procedure should, therefore, be adopted as outlined by the company’s overall tax governance framework, with the specific course action being determined by the timing of the hand over.
COSO*, a recognised thought leader in the areas of risk and control, has recently released a proposed update to their “Internal Control - Integrated Framework” publication.
The framework is one of the most widely used for designing and evaluating systems of internal control.
This enhanced framework has been updated to address the fact that businesses have become increasingly global, complex and technology driven. There is greater engagement by investors and increased scrutiny from regulators seeking higher levels of transparency and accountability for the integrity of the internal control systems that support organisations’ operations, governance, and external communications.
As such, this is a useful reference tool for any SAO seeking to obtain comfort over the adequacy of their own internal control environment and the mechanisms available to them. HMRC is also increasingly making reference to it in discussions with us on SAO.
The KPMG briefing sheet can be viewed by following the link below:
(*) “Committee of Sponsoring Organizations of the Treadway Commission”
Following a consultation period, HMRC have indicated that its revised guidance on Senior Accounting Officer regulations will be published on or before 1 April 2012.
There are significant changes in HMRC’s position in the following areas:
- Banks and insurance companies who were previously exempt from the turnover test will now be within scope
- Overseas activities of UK companies are now included within the purview of the regulations
- Confirmation that SAO rules will apply where insolvency procedures are underway
It is important to emphasise that the ‘light touch’ approach to year one is considered as a ‘once-only’ concession by HMRC and will not be included in the revised SAO guidance. However, where companies newly enter the SAO regime by virtue of the revised guidance (and not simply because they newly qualify under the existing turnover and balance sheet tests) HMRC have confirmed that a similar ‘light touch’ approach will be applied to the first year after issuance of the revised guidance.
With most qualifying companies now exiting the ‘light touch’ year, the revised HMRC guidelines will invariably place a greater deal scrutiny on how companies are ensuring their SAO obligations are being met.
KPMG has launched the SAO Diamond, an assessment tool designed to provide SAOs with a high level overview of the current state of their existing tax framework.
The tool will provide an initial assessment of key issues surrounding governance and tax accounting arrangements and is intended to prepare companies and their SAO(s) for more detailed enquiries from HMRC.
In addition to highlighting a roadmap on SAO compliance, we anticipate the Diamond to provide an insightful benchmark against peers which will facilitate discussion with internal stakeholders on the wider concept of tax risk and governance.