Duties of senior accounting officers of [large] [qualifying] companies - Section 93 of and Schedule 46 to the Finance Act 2009 - as amended in committee
Background
According to the Finance Bill explanatory note, "Large companies make a major contribution to the Exchequer. Inadequate tax accounting arrangements within such companies (or groups) can lead to misreporting of tax liabilities of very large amounts. Currently there is no legal obligation on any particular director or company officer to ensure that the company has appropriate tax accounting arrangements. This clause and Schedule will make the senior accounting officer with a company personally responsible for doing so".
The Regulatory Impact Assessment states that "there may be an increase in tax revenue as a result of more accurate tax computations by those companies who do not presently have adequate accounting systems and for whom this measure prompts them to improve them to the required standard. We estimate that there will be additional yield to the exchequer of £140 million over 4 years".
Original proposals
Under the original proposals, senior accounting officers ("SAO") of large companies were obliged to take reasonable steps to ensure that the company (and any subsidiaries) established and maintained appropriate tax accounting arrangements. They had to provide the company's auditors and HMRC with an explanation of the respects in which those arrangements were not appropriate (if that was indeed going to be the case).
There was also an obligation on the SAO to certify to HMRC either that the company had appropriate accounting arrangements in place throughout the year, or if didn't why, and in what respect, those accounting arrangements were deficient.
Penalties could be imposed upon both the SAO and the company for failing to comply. The legislation was designed to come into effect in relation to financial years beginning on or after the day on which the Finance Act 2009 is passed.
A number of amendments have now been made to these original proposals.
Amended proposal in brief
The main changes to the original proposals are:
a) The provisions only apply to SAO's of "qualifying" companies, rather than large companies. The financial limits for qualifying companies are far greater than the original ones (see below).
b) It only applies to the qualifying company itself, not to its subsidiaries.
c) Only one form of certificate needs be submitted to HMRC.
d) It only applies to certain taxes, not all taxes and duties.
e) There is a materiality threshold regarding the accuracy of the tax liabilities arising from the accounting arrangements.
The new provisions in detail
The duties
There are two duties:
The first, identified as the "main duty" is that the SAO of a qualifying company must take reasonable steps to ensure that the company establishes and maintains appropriate tax accounting arrangements. This general obligation is then supplemented by two specific obligations (ie. the SAO must monitor the accounting arrangements and identify any respect in which the arrangements are not appropriate tax accounting arrangements).
An appropriate tax accounting arrangement is defined as "accounting arrangements that enable the company's relevant liability to be calculated accurately in all material respects".
There is then a subsidiary duty. This is to submit a certificate to HMRC, for each financial year of the company. The certificate must either state that the company had appropriate tax accounting arrangements in place throughout the financial year; or, if it did not, provide an explanation as to the respects in which the accounting arrangements were deficient.
Relevant liabilities
This is now restricted to liabilities in respect of certain specified taxes; most notably corporation tax, VAT, amounts for which the company is accountable under PAYE, IPT, SDLT, SDRT, PRT, customs duties and excise duties.
Note that income tax is not a relevant liability, so a non-UK company which receives income from UK property, is outside the scope of these provisions.
Penalties
Failure to comply with any of these duties renders the SAO liable to a penalty of £5,000 per failure.
This is recoverable as if it were income tax of the SAO.
There are provisions to ensure there is no double recovery is an SAO is SAO of more than one qualifying company in the same group.
Senior Accounting Officer
The company must notify HMRC of the name of each person who is its SAO at any time during the year. This declaration must be given (at the latest) of the statutory date for filing the accounts for the relevant financial year.
The SAO must be an officer of the company and is the person who "in the company's reasonable opinion has overall responsibility for the company's financial accounting arrangements". If there is a group, it is the group director or officer who has that overall responsibility.
The company can be penalised if it fails to notify HMRC of the name of its SAO.
If there is more than one SAO in a financial year, the penalty will be levied on the SAO who is last in post in relation to the matter being penalised. This has implications on M&A deals. A buyer will need to conduct due diligence on the systems and the notification/certification which may have been given in past and current financial years. Indemnity against penalties will be required and de minimis adjusted accordingly.
Reasonable excuse
Both the company and the SAO can avoid liability to a penalty for failure to comply with its/their obligations if it can establish a reasonable excuse. The usual carve outs apply.
Assessments and appeals
Penalties can only be levied by way of an assessment, against which both the company and the SAO have a right of appeal.
There are two alternative time periods within which the assessment must be made. It may not be made more than six months after the failure or inaccuracy first comes to the attention of HMRC; or more than six years after the end of the period for filing the accounts for the relevant financial year.
Qualifying company
A qualifying company is one where one or other of the following tests are satisfied, namely; relevant turnover of more than £200 million, or relevant balance sheet total of more than £2 billion, at the end of the previous financial year.
A company can only be a qualifying company if it is a company as defined in section 1(1) of the Companies Act 2006. This restricts companies to those which are formed and registered under the Companies Act. So it does not appear to include non-UK registered companies, even if they are trading in the UK through a permanent establishment, or they are deemed UK resident by virtue of their central management and control being carried out in the UK.
If the company is a member of a group, then the turnover and balance sheets of 51% subsidiaries or parents can be taken into account when considering the thresholds mentioned above. So a UK holding company with two subsidiaries will qualify if the combined turnover is more than £200 million or the relevant balance sheet total is more than £2 billion.
This will be the case if the holding company is a UK registered company, but the subsidiaries are both non-UK companies. Their financial attributes can be attributed to the group, and any UK registered company which is a member of the group will be a qualifying company for the purposes of these provisions.
A company does not include an open ended investment company, and the turnover and balance sheet status of a limited liability partnership cannot be taken into account when considering the collective turnover or balance sheet position of a group.
Guidance
HMRC have issued guidance on these SAO proposals.