Britain Proposes SOX-Like Change to Tax Reporting

Large British companies and foreign businesses that pay U.K. taxes are suddenly facing a big increase in their tax compliance costs, thanks to a surprise proposal announced in the government’s recent budget.

The plan is to make a company’s senior accounting officer—typically the CFO—personally responsible for the adequacy of the company’s tax systems. An “SAO” who fails to ensure the right tax controls are in place will be hit with a penalty of up to $7,500.

The government says the move simply reinforces existing obligations to take due care when filing returns, and the compliance cost would be “negligible” for companies with adequate accounting systems, it claims.

Critics, however, say the idea is tantamount to imposing a tax version of the United States’ Sarbanes-Oxley Act, and will saddle companies with many new compliance costs as they beef up controls for their tax reporting. Even companies that are already SOX compliant will have work to do.

Monteith

“This is an extraordinary retrograde step which shows little sign of learning the lessons of Sarbanes-Oxley,” says Michael Wistow, head of tax at the law firm Berwin Leighton Paisner. Anita Monteith, tax manager the Institute of Chartered Accountants in England & Wales, describes it as “an incredibly onerous obligation, particularly as it imposes a personally liability on the person signing.”

The proposal, set to become law later this year, would require the SAO to ensure and certify that the company’s accounting systems are adequate for the purposes of accurate tax reporting, and that relevant internal controls are monitored. Any material weaknesses in the controls would have to be disclosed to HM Revenue and Customs, the British tax authority.

The SAO would not have to guarantee that the tax return itself was accurate.

Still, the wording of the proposal mirrors the obligation that SOX places on CFOs for financial controls. Indeed, a government briefing paper on the legislation acknowledges that it lifted the idea straight from U.S. law. The measure would provide “a clear point of accountability” within a company for tax controls, it says, leading to more accurate tax computations.

“ This is an extraordinary retrograde step which shows little sign of learning the lessons of Sarbanes-Oxley.”

— Michael Wistow,

Head of Tax Law,

Berwin Leighton Paisner

The HMRC says the proposal would affect around 1,600 to 2,000 executives and raise $211 million in extra tax over four years. It would apply to accounting periods starting on or after July 21, 2009. Companies have to comply if they meet two of three criteria: revenue of more than $34 million; a balance sheet of more than $17 million; or a workforce of more than 250 employees.

Baron

The idea has alarmed the British business community, which says it will have a much wider impact than the government claims and cost far more to comply. “Every transaction could affect the tax position, so the ramifications will go far beyond the tax department,” says Richard Baron, head of taxation at business association the Institute of Directors.

Moreover, while audits of financial statements use a well-defined concept of materiality, tax law does not. At least in theory, Baron says, “You are supposed to get it right to the last pound,” The HMRC can toe a more relaxed line in practice, but it has not yet issued any guidance on how materiality would apply to this measure. The draft legislation boldly states that a company’s control systems must allow tax liability “to be calculated accurately.”

Companies that are already SOX-compliant are not necessarily off the hook. SOX is about getting the numbers in your financial statements right; this proposal is about tax returns. The two are very different.

The big accounting firms are already warning about the scale of the work needed to comply with the measure. Angus Johnston, leader of Pricewaterhouse Coopers’ tax management and accounting services group in London, says U.S. clients will not necessarily like what they hear.

“The vast majority of the work they have done on SOX will have no great bearing on this,” he says, because the tax-related controls now under consideration would usually not have been material enough to be documented under SOX.

SOX-compliant controls probably will make compliance with the British proposal an easier process, but by no means should executives assume that SOX work alone is sufficient to sign the certification, Johnston adds.

A briefing note from Deloitte dismisses the government’s claim that compliance costs will be minimal. “We would expect the reality, in line with the U.S. experience, to be that considerable additional work will need to be undertaken in relation to documentation of processes, assessment, and benchmarking of risks and the adequacy of controls and the implementation of remediation plans as well as potential changes to the set up of accounting systems,” the firm says.

KPMG says the lack of detail about how the proposal would be implemented is alarming. “It’s unclear what steps would be regarded as reasonable, and what level of monitoring would be required,” the firm said in a statement. “Many companies are likely to have difficulty in confirming that their systems are adequate for all tax computation purposes, particularly in relation to complex areas such as transfer pricing.”

Monteith from the ICAEW says her organization is planning to hold a meeting of accountants working in business, to discuss how the proposal affects them. She expects them to be “banging their fists on the table” in anger.

A lack of advance consultation on the measure doesn’t help. Most CFOs approached for comment in this article say they received no warning of what the HMRC was planning, and didn’t know the details. “The normal way of dealing with something like this is to discuss and consult, and not just come up with something that will cripple everyone with a new admin burden,” Monteith says.

Mervyn Woods, head of tax policy, at the Confederation of British Industry, complains that the measure had been “sprung on companies” without any prior consultation.

“As well as placing an extra administrative burden on companies, the change would mean incurring the extra costs of obtaining professional advice, both to understand what the government is seeking to do and to ensure proper compliance,” he says.