South: Tax turmoil on liability predicted by BDO

Senior accounting officers (SAOs) of large companies will soon be required to provide personal certification that their accounting systems are capable of ensuring accuracy in their tax reporting.

Budget introduced reforms could see SAOs personally liable for penalties of up to £15,000 per year for non-compliance. They will send shockwaves through larger businesses as they attempt to adjust in time, according to accountants and business advisers BDO Stoy Hayward.

Stuart Lisle, tax partner at BDO Stoy Hayward in Southampton, said: “The Budget introduced a requirement for SAOs of large companies to provide an annual certificate to HM Revenue & Customs (HMRC) stating that adequate systems are in place to produce accurate returns across all forms of tax.

“Penalties can be raised personally on SAOs of up to £15,000 for non-compliance. The new rules are to be introduced later this year and the decision to make SAOs personally responsible for the adequacy of their company’s tax accounting systems has raised huge concerns amongst the business community.”

Business affected by the reforms are those with in excess of at least two of the following three items; turnover above £22.8m, a balance sheet total greater than £11.4m and with more than 250 staff.

The proposals apply to all taxes, including employment, direct and indirect taxes and state that SAOs will be required to take three actions:

• Take reasonable steps to ensure the company/group establishes, maintains and monitors appropriate tax accounting arrangements.

• If the arrangements are not appropriate, they must provide the company’s auditors with a suitable explanation.

• Certify annually to HMRC that adequate systems are in place to produce accurate tax returns. (If the systems are not adequate, the SAO must prove an explanation has been given to the company’s auditors.)

A penalty of £5,000 will be raised on the SAO for a failure to comply with each and any of these three obligations. Additional penalties can be raised on the company.

The proposals follow on from HMRC's increased focus on reviewing business systems following the review of links with large business in 2006. To date, this has focussed on encouraging compliance through the risk review process. The new proposals are intended to reinforce HMRC's view of the importance of systems to enable "the right tax at the right time.”

Stuart Lisle continued: “The introduction of this declaration has caught everyone on the hop. Nobody saw it coming and it has already created a degree of concern among larger corporates as there has never been a requirement for this type of declaration before.

“The proposal could potentially place significant additional compliance burdens on businesses. The systems requiring reviews include IT systems and tax-relevant accounting, reconciliation and consolidation processes such as homegrown spreadsheets and bespoke internal workflows.

“A company cannot choose the SAO randomly. The SAO is the director or officer of the company who has overall responsibility for the company’s financial accounting arrangements and must be based in the UK. I think we might see many businesses experiencing real difficulty where operations are divisionalised – who exactly will be the one identified person to assume responsibility for overall system compliance and therein be personally liable? This will be a responsibility that nobody will want to take on for fear of being penalised.”

HMRC estimates that 60,000 companies and 1,600 to 2,000 SAOs will be impacted by the proposals, which will be applicable to returns for accounting periods beginning on or after the date of Royal Assent.