UK taxes: Senior accounting officer sign-off for employment and mobility taxes

Senior accounting officer

The 2009 Finance Act was given Royal Assent on 21 July 2009, heralding the introduction in large groups of a requirement for a nominated Senior Accounting Officer (SAO) to provide annual assurance to HM Revenue and Customs that appropriate tax accounting policies and processes are in place and maintained.

People responsible for payroll, employment taxes and mobility will have a greater level of accountability to the SAO as a result of this new regime.


Taking reasonable steps

The rules apply to UK incorporated companies, including the UK operations (and foreign branches) of large UK-parented groups and foreign multinationals, to the extent they have significant subsidiaries in the UK. They have effect for financial years beginning on or after 21 July 2009. In this context large companies/groups are those with turnover of more than £200m or gross assets of more than £2bn. The rules place a personal duty on the SAO of qualifying companies to:
- Take reasonable steps to ensure that the company maintains and establishes appropriate tax accounting arrangements; and
- Provide an annual certification to HMRC stating that appropriate arrangements were in place throughout the period or, if not, identifying any deficiencies.

As a reminder, a group SAO who fails to comply with these requirements will suffer a personal penalty of £5,000 in relation to each duty for each year.


Although ministers and senior HMRC officials have said that they do not expect the SAO requirements to create additional work for responsible businesses, we expect SAOs to seek assurance from relevant individuals within their organization that appropriate controls are in place. This will extend to issues surrounding compensation, benefits and mobility, which are mostly brought into scope through PAYE.

Personal liabilities for SAO – The requirements are unlike anything seen before in UK tax law: they impose personal duties and potentially penalties on individual officers.

The rationale for this measure is to ensure that senior management understands the need to have systems and processes in place that can calculate and file accurate tax liabilities. This is an area where HMRC perceived an "accountability gap"
previously.

The rules are clearly aimed at CFOs because the expectation is that they will arrange for more effective supervision, where required, of existing owners of employment tax issues in tax and HR departments. While the financial penalties may not be severe, in a Deloitte survey of CFOs 90% said that the reputational consequences of the penalty would be taken very seriously.


Sign-off, sign-on or sign-out?

Employment tax& mobility implications – The legislation specifically covers calculation of tax under the PAYE regulations but there are many elements of employer compliance which will contribute to accurate PAYE. The areas which are likely to cause concern for employers include expenses, benefits, bonuses, short term business travelers, international secondees, PAYE Settlement Agreements, entertaining, equity, terminations and travel, amongst others. Companies with internationally mobile populations or complex travel and expense policies which are not fully integrated into their systems are likely to find the requirements particularly challenging.

A Deloitte survey of businesses in May 2009 found that PAYE/NIC and VAT rather than corporation tax were the two most concerning areas. (HMRC have since clarified that neither NIC nor the Construction Industry Scheme are subject to the new measure).

HMRC have published guidance including examples which specifically outline how weaknesses in a travel expense claim process or in differentiating between allowable and taxable expenses would constitute failures if not addressed; however, these examples are by no means comprehensive and the legislation is based on principles rather than being prescriptive.

With employment and mobility issues being firmly within the scope of the rules which cover PAYE, the adequacy of controls and the proper identification of risk issues will be under greater scrutiny from the SAO. The activity undertaken by the SAO to ensure compliance will increasingly impact those responsible for expatriate and employment tax within the business.

Risk awareness – It is important to understand key areas of risk and where there are potential areas that might result in the SAO not being able to sign-off that the company maintains appropriate tax accounting arrangements.

From an employer tax and mobility perspective, some key questions to consider include:
- Do you have procedures in place to ensure that global compensation management is correctly reported to HMRC, including apportionment of equity, pension contributions, bonuses, allowances and expenses?
- Do you identify, track and report all people coming to the UK for more than 30 days and where appropriate include them on either a short term business visitor report or on payroll, without compromising immigration status?
- Do you have a documented tax strategy for managing employer tax compliance?
- Do you have documentation in place that sets out all of the employment tax requirements for the business and assignees responsibility and sign-off, and this is regularly reviewed?
- Do you have a process for identifying and tracking tax risks relating to the compliance process?
- How many manual adjustments are required from the point transactions are initially recorded into the accounting system to the point of producing tax returns?

What now? – Some of the questions you should now be asking include:
- Is your group within the rules, and from what date? If your company's next year end is before 31 March 2010 will PAYE be correctly calculated for the whole of 2009/10 by April 2010.
- Who is the relevant SAO?
- What is my role and am I able to provide the appropriate sign-off to the SAO?
- Do current processes and controls give sufficient assurance to the SAO for the required declarations, and if not, how will arrangements be critiqued and improved?
- Should the group be having early discussions with HMRC on its interpretation of the rules and its response to deficiencies, if any?
- Given the focus on tax processes and systems, what opportunities might there be to generate cash tax benefits for the business at the same time as ensuring compliance for SAO purposes?

To assist companies in highlighting the specific areas where there is a likelihood of non-compliance, or a particularly significant risk, Deloitte has developed a risk diagnostic tool. The tool can be used specifically to focus on employer tax and mobility related areas, or to look more broadly at all the areas of tax to which these new rules apply. The tool has been designed to be utilised by companies as the basis for an initial assessment of their risk; an approach which might constitute taking 'reasonable steps' in the first year.

Once an assessment has been carried out then strategies, processes and systems should be designed and maintained in order to ensure that employers have visibility, control and accuracy across their organization. Deloitte has already developed proven responses in remediation of these issues using "An End To PAYE Audits" and "Mobility Risk Management" methodologies.

If your group is within the rules it is important to consider whether you are clear about the start date, whether there are arrangements in place across employment taxes and mobility, and whether there is a clear line of reporting to the SAO. Critiquing internal arrangements, systems and processes, putting remediation strategies in place, and entering into early discussions with HMRC will prove beneficial. Activity undertaken to improve processes and systems should result in streamlined, tax efficient systems with increased internal recognition of the risk and control issues associated with employment taxes and mobility.