Personal accountability for SAOs - what the draft legislation really means

H: Jayne Constantinis, host
E: Ed Dwan, BDO Stoy Hayward
T: Tony Spillett, tax partners at BDO Stoy Hayward

H: Hello and welcome to the Personal Finance Show, I’m Jayne Constantinis. Now back in April the G20 met in London, and one of the outcomes resulted in HM Revenue and Customs working on new guidelines for senior accounting officers. The purpose of introducing new legislation is to put greater responsibility on the individual on top of existing corporate rules. With Royal ascent on the new legislation imminent, how will this affect you and your business? Well joining me today to talk about this are tax specialists Ed Dwan and Tony Spillett, from BDO Stoy Hayward. Thank you very much for coming in to talk to us. Let’s begin if we could, Ed, by talking about why there’s been a change?

E: Basically, as you say Jayne, it came out of the G20 summit, we believe it’s actually the treasury rather than the revenue themselves who have pushed for this change. The rationale behind it is really about transparency in the boardroom for tax. There’s been a lot of noise around that within the revenue for a number of years, this is the latest version of that, an idea whereby someone senior in an organisation actually outside of the tax department, signs off on the tax systems and processes

H: Ok. So could you just give us, in a nutshell – I know it’s very complicated, but the headlines on what the new rules are?

T: Well the new rules basically – first of all require the companies to notify the revenue of the senior accounting officer, and then for the senior accounting officer to sign a certificate at the end of every year to set out that the systems used for the production of tax returns are adequate, and the revenue have increased the threshold of the size of company to which it applies, so now it’s only UK groups with turnover over £200 million, or gross assets over £2 billion that are affected, so it’s looking to really take on the largest two or so thousand UK groups

H: So below that threshold people who are watching who are below that threshold – they’re ok?

E: They’re ok. I mean it’s – but it’s an ongoing thing so obviously for companies and we have a few clients at the moment who are in the sort of 150 – 170 million turnover bracket, that are figuring they’re going to have to look at this because that’s – they aspire to be in that sort of bracket in the next few years

H: And you’ve talked – you’ve said that there are – new responsibilities on the SAO – who can this be within an organisation? Who should it be?

E: Well the revenue have said now they’re reasonably flexible about who it should be, they’re going to leave that up to companies ultimately but they do think it should be a senior financial person within the organisation. They are very keen for it not to be a tax person because of this transparency in the boardroom issue, it doesn’t have to be a director but they would like it to be a senior person, someone who genuinely has responsibility within the organisation for the finances

T: It’s really the responsibility for the systems that are used, the accounting systems that are used to produce tax returns, which I think is why the revenue have also turned to the accounting side rather than the tax side, so that’s important

E: And the other point to make on that Jayne is there can be more than one senior accounting officer within one organisation

H: Ok

E: So for heavily divisionalised businesses you will maybe get two, possibly even more people taking on this role

H: Ok and the – but that’s not discretionary, there are very strict rules about that that –

E: Well again it’s really about akin to the organisation themselves and what the revenue have said is they will encourage people to have a dialogue with them around if they’re struggling to identify who it should be, they encourage people to have a dialogue with them around that

H: And once that person has been identified within the organisation they then have to notify the revenue do they?

T: Yes

E: Yes that’s right yes

T: Yes if the company doesn’t notify the revenue in time, then the company can be subject to a £5000 fine so there’s a – there’s quite a lot of importance there

H: So you’ve raised the word “fine” –

T: Yes

H: An issue that I think is probably causing some concern. Just talk us through will you what the penalties are for the individual, and this is a big change isn’t it, that there’s now an element of personal liability?

T: Yes there are effectively three sets of £5000 fine. The first one applies to the company, so if it doesn’t notify the revenue of its senior accounting officer, there’s one £5000 fine and then effectively there’s another £5000 fine for the senior accounting officer if the – if the systems are not adequate, and then a further £5000 fine if that’s not explained to the revenue properly. So you can end up with £10,000 of personal fines which is quite an expensive price to pay, and so far as we’re away they’re non-negotiable, you know you’re either in it or you’re not in it, although the revenue have said they’ll be lenient in the first year because they recognise they are new rules and they’re not trying to pick holes in companies that are basically compliant, they’re looking for offenders

H: It’s not like a parking fine, if you pay it quickly you can pay half

T: No absolutely

E: Unfortunately not, no

H: Exactly

E: If you’re in it –

H: So thinking beyond the monetary aspect, what about the reputational damage that could be done to somebody who – you know – finds that they are liable for a fine?

E: Well this is the bit that no one really knows to be honest Jayne. I think it concerns quite a few people, particularly, I think, financial directors or CFOs who may take on this role. They are quite concerned I think if they get caught with this fine does this have implications for their membership of you know regulatory bodies etc, some of the things they have to sign off reputationally year on year, fit and proper, all those kind of issues – does it impact those? I think it’s also got a reputational impact for the organisation with the revenue, and that’s the other big thing. We shouldn’t focus just on the fines here, for the individuals although that’s serious, we should also say what are the implications for the organisation because the danger is if the revenue find a problem here is that they could subject that organisation to a very large scale enquiry

H: Yes

T: Each of the organisations that are affected by this will have a customer relationship manager with the revenue, and one of their responsibilities is to carry out a risk assessment, and clearly if there are problems on the senior accounting officer’s side, and certainly fines have been paid, then you’ll expect that to increase the risk rating which is generally bad news for the company

H: And a few minutes ago you talked about picking holes in or finding loopholes. Just give us a very concrete example. Obviously we don’t want to go into all the detailed rules, of something where a company might find itself in trouble where it wouldn’t have been before. One tiny piece of new legislation if you like

T: Well typically the sort of area where you could get in trouble with the senior accounting officer legislation would be if you’re using a large, home-grown spreadsheet to take your accounting – the information from your accounting system and produce the tax reporting information from it, because typically these spreadsheets are built up over a period of time, they’ve been adapted and amended as new legislations come in, and they’re largely untested, you know they kind of work internally but no one’s actually looked at them to say actually does this produce the right result. So any home-grown spreadsheet that has just got a couple of errors in it or doesn’t quite perform the function that it’s designed for, in my view that could lead to problems in this legislation

H: Now what you’ve said may set alarm bells ringing among people who are going to have this new responsibility – is it a question of chucking out everything they’ve done to date and starting again? How big a change is it going to involve?

E: No absolutely not Jayne. I mean I think one of the myths that’s grown up around this whole new piece is that there is a need for a whole scale systems review, and all the cost and problems that entails. I mean our view is very much that actually you need to look at what you already have in place and look for the bits where you’re not quite robust enough, and that’s what we think will happen with most organisations, you know there may be a few out there who have got serious problems that will need addressing but we think for the bulk of the companies impacted by this, it really is about find the gaps and plug those gaps

H: I mean I think I’ve heard other accountancy firms talking about the scale of the changes, and it does seem to be enormous

T: Yes but I think you have to look at what the revenue have said as well, because they’re the ones who are responsible for policing this and they have come out and said that in their view the majority of the companies have already got what they need in place and so there should be a relatively small amount of additional work required, and I think that you know that maybe understates quite what is needed in a company because they’ll be a whole range of different people in different departments who have to kind of link in together and assess whether what they’ve got is sufficient, but I think that as a minimum people just need to look and see what they have got and make sure they can just get over the line, get over the hurdle that has been set here, but not throw everything out and start again, I think that’s over-dramatic

H: Yes. As with so many things it’s probably somewhere between what the revenue is saying and what others are saying

T: Yes, absolutely. I want to come back to which other departments are going to be affected in a second, but I want to take this question that’s come in from Andrew Watters, “for companies who are currently outside the qualifying criteria, but subsequently meet these criteria” – you were saying like some of your current clients – “will they be given a grace year in which it will be acceptable to be making efforts to put in place arrangements, rather than having them in place?”

E: This isn’t entirely clear at the moment. What the revenue have said is that the limits apply to the previous financial year, so effectively if you’re in financial year 2009, you suddenly hit the limits, then for the following year, 2010, you would then be within the remit of this legislation. Now obviously the point that Andrew’s making there is that doesn’t give you any time at all potentially, if you just suddenly hit the limit, to set things right. So we do think, just as the revenue have said at the moment, that they’ll take a what they call a light touch, for people in the first year of this, they will probably adopt something similar – at the risk of being a spokesperson for the revenue – I think their view would be an individual in that position needs to talk to them about how they manage that and what they’re trying to do. The whole thing around this is being seen to take reasonable steps, and I think if you take reasonable steps in that circumstance I think the revenue will probably be ok with that. But there will be a limit to that, there’s a point beyond which you really have to comply

H: Sure. And you’ve used the word “dialogue” to set up a dialogue with the revenue. They’re not that scary are they?

E: No, no they’re not. I mean I think – but I think you want to have that dialogue on an informed basis, I think if you go to the revenue with a blank sheet of paper round this they might fill that sheet of paper with a bunch of things you don’t really want to do

H: Ok

E: So you really want to lead them a bit in terms of where you’ll end up

H: John said, pertinent to what we were discussing a few minutes ago – “surely this legislation will affect the whole company, what procedures should other departments have in place?” You mentioned risk

T: Yes

H: I’m thinking that maybe the risk department of a big organisation might be involved too?

T: Yes because it does affect all tax returns, it affects corporate tax, pay as you earn, and VAT as well and typically pay as you earn may be dealt with by an HR department, who might also deal with ex-patriots. VAT may well be dealt with down in an operating company level, whereas corporate tax may be dealt with by head office. So there’ll be a whole range of people who may well be affected by this, and I think one of the first steps is actually to work out who the key stakeholders in the organisation are, and get them all involved to make sure that when you are signing off the certificates as the senior accounting officer, you have actually investigated all the different elements that are relevant, but I think you know it certainly involves HR, treasury, legal, tax, accounting – so quite a wide range of people

H: And not wanting to give you too big a plug obviously but is this something that you believe organisations can handle themselves? Is it something that can be done internally or do they need an external a) perspective and b) input?

E: I think they can do a lot internally, I think that’s – and I do think whatever organisations do it should be bespoke to them, you know I don’t think – there isn’t a one-size-fits-all solution to this. But I do think there is a need for some external perspective because I think it’s very difficult for example for a tax department to effectively self-critique what they do, and likewise for the other bits of the organisation, so I think there is a role for external advisors, there’s always a role for internal auditors, again there’s a whole group of different people who if you team them together I think can get the required solution

H: Let’s take a question from – or a point from Catherine who says “this just sounds like a compliance nightmare. Will companies be getting full details through so that we can check what it really means day-to-day?”

T: Yes I think that certainly early on it did seem like a compliance nightmare because it was a new set of rules, new red tape and people didn’t really quite know how they’d operate, and there has been some pretty detailed guidance released by the revenue, in terms of who is covered by this, what may constitute reasonable steps etc, but what has not been released is sort of a work programme that people will need to follow in order to make sure that they are compliant, that’s been left up to the company. So you know compliance nightmare I think no. Requirement to do some work at the outset, I think yes. But that can either – as I said a lot of that can be dealt with internally, or can be facilitated by advisors?

H: So where would you advise people to go to get as much detailed information as is available on what they need to do on a day-to-day basis?

T: I think initially probably to read the revenue guidance that’s come out, and there’s also a lot of information just generally available on the internet now of course

H: Yes

T: To get a better perspective, because the rules have moved on quite a lot since they were first introduced in the budget, but it’s important to be up-to-date with exactly what is now covered. So there is quite a lot available

H: And just to answer Steven Saunders’ question, he’s saying “is the revenue going to write to them to explain the new rules?” And the answer to that is no, the revenue’s not going to be writing, the onus is on them to seek the information and then perhaps set up a dialogue with the revenue should they need clarification. James wants to know, and now we’re getting onto the day-to-day business. How is the new legislation going to affect FD’s day-to-day? Does he need to change his procedures? So if you were to say to any FDs watching, what do you need to do today and what do you need to do tomorrow, what would you say?

E: I mean I think today, identify who the senior accounting officer is going to be, so is it going to be them or are they going to delegate that responsibility to someone else, also fairly senior within the organisation? So I think that’s the first thing to do. I think to then start to say you have to change a lot of day-to-day procedures at FD level, I don’t think that’s the case. I think for FDs it depends very much on what they currently do, and particularly what they currently do around tax. Some have a very hands-on approach, some delegate it to a tax director, so it’s really understanding where they sit there and getting a feel for how they, how they approach this so that they can still do their day job, because tax isn’t really their day job

H: Yes

E: How they can still do that but still monitor what’s going on, because once this is up and running that’s their other responsibility is to monitor the progress of this. So going forward they will effectively be signing off on two issues. One that the processes are fit for purpose, but two that actually they’re monitoring that on an ongoing basis

H: Now one thing we haven’t touched on is cost. How much is this likely to cost a large organisation?

T: It’s something of an unknown because as Ed said there’ll be a lot of companies who can deal with this sort of thing internally and will choose to deal with it that way. If companies do need significant revisions to their processes, for example they need to change a lot of internal spreadsheets, or you know their accounting systems actually just aren’t in that good shape, then obviously it will cost a lot of money. But it will be, it will vary from company to company which I know isn’t answering the question, but actually the more compliant that you can self-assess you are, then I think the less advisor input that you can get away with

E: I think that’s right. I think the other thing is – the cost can work both ways, so you have a cost even if you internalise this there is a cost to that, because those people could be doing something else, so I think it’s getting that balance right as well. The thing that having spoken to a lot of companies around this, the thing that most of them suspect they will have to do is do some kind of underlying documentation just to say what are our processes around this, because for most of them they haven’t actually gone through that exercise yet, so as a minimum we think it may be very difficult for the senior accounting officer to sign off if they didn’t know what they were signing off on, and that needs to be down on a piece of paper

H: I mean I know this is for the revenue, but is there actually, underlying this, an element that it’s going to sharpen up perhaps some practices and therefore make the company run more efficiently?

E: Yes I mean absolutely. I think if you approach it in that light I think absolutely it should do. I mean I can think of one client whose got issues around pay as you earn say which they struggle to get anyone senior to really bother too much about, whereas this is going to force that issue onto the agenda and actually going forward that’s got to be better. You know that they are getting things right, because for all they know that might actually cost them money at the moment, they might be overpaying, you know some of these systems issues are not around people knowingly underpaying it’s just they don’t really know if they’re getting the right answer

H: And when is this coming into effect?

T: Well it will come into effect for the first accounting period ending – beginning after Royal Ascent, and royal ascent is due to take place later on this month, so it could be a company with a 1^st August accounting period, that there is already affected, so for example if you had to submit a quarterly VAT return on 31^st August you’d already be within the rules, so it’s pretty imminent. A lot of companies have 31^st December year end so they will be outside of the rules until 1^st January next year, which gives them a bit of time just to have a look and see what they’ve got and be very well prepared for the new rules that come in, and you know I think that’s a good period of time for them to get themselves up and running on these rules

H: Ok. Final word. Should people be panicking?

E: No. You should never panic about tax no, it’s important but it’s not that important is it?

H: I thought it was death and taxes, the only two certainties in life!

T: Panic about death, but not tax

H: Fantastic ok well I hope you’ve clarified a lot of issues for a lot of people watching, thank you very much indeed, and if you’d like more information then go to the website which is www.bdo.co.uk/personalaccountability. Thank you for watching, I hope that’s clarified some issues for you. Bye bye for now.