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I welcome the provisions. The chief finance office should be clearly seen to have an independent role in accounting to the board. When my right hon. Friend the Financial Secretary puts the Government’s case, I wonder whether he could tell us whether it is automatically assumed that the chief finance office will be a board member, because the Bill refers to officers or directors. It is terribly important that the person charged with that responsibility should be a director, not some officer who can escape a sense of personal responsibility. A finance office in a major British multinational or international company will feel a heavy personal commitment and a personal burden, which he will have to bear in the interests of the whole company, with a direct responsibility enshrined in law and a fine attached, related to the performance of that function. If a finance officer were to be fined, in all probability he would seek and obtain an indemnity from the company, and rightly so. Nevertheless, the fact that he has been fined will weigh heavily on him, if he is responsible in the exercise of his duties, and therefore reinforce the general sense
of this part of the Bill, and the general purpose for which the Government have introduced it—and I am pleased to see it there.
I am sure that the Financial Secretary will reassure us on the need for consultation and the other matters that the industry will bring to him in due course. We look forward to hearing what he has to tell us in that respect.
Mr. Jeremy Browne (Taunton) (LD): The proposals are far-reaching in their implications and were introduced without meaningful notice or consultation. I have received representations from groups such as the Chartered Institute of Taxation and the Institute of Chartered Accountants in England and Wales, and from companies such as PricewaterhouseCoopers. They have raised a series of concerns with me, as they no doubt have with MPs from all parties, about the potential implications of what we are considering, including what they regard as possibly unforeseen implications. Indeed, the hon. Member for Fareham (Mr. Hoban) read out a quotation from the Institute of Chartered Accountants that summed up those concerns precisely.
I propose to highlight three concerns that my party and I have about the Government’s proposals, and then to suggest how we might deal with them. The first concern is about the aspect of personal liability. All parties in the House would wish to see companies that failed to comply with the law dealt with accordingly, but the Government’s proposal makes a distinction between the organisation and the individual. The hon. Member for Poole (Mr. Syms) asked what implications that might have, and whether they might go further than the Government envisaged. It is therefore important to explore the aspect of personal liability in greater depth in Committee.
Our second concern is about the lack of clear definition. Paragraph 8 of schedule 46 says that only the most recent senior accounting officer will be liable, but there will still be issues if errors have been made in the past. If the most recent senior accounting officer has been in post only for a short period, the provision may not be so satisfactory, whereas if he or she has been in post for a long time, we would be able to go back much further. There is therefore some doubt about how the provision will apply in practice.
No one knows what HMRC thinks will constitute adequate or accurate reporting systems. One person’s idea of adequacy may be markedly different from another person’s. Indeed, in accountancy, one person’s idea of accuracy may occasionally be different from another person’s idea of accuracy. As far as I am aware, no guidelines have been published so far to clarify those points.
My final point about the lack of definition is about the implications for UK multinationals based primarily in this country—a point that was made earlier. However, I do not think that the following point has been made: what if the senior accounting officer is not based in the United Kingdom, even if most of the company is? How will the law work in practice then?
The third area of concern that I have identified in gathering together the themes that others have expressed to me relates to the regulatory burden and the costs involved. The rules will be up and running from October, and there is genuine anxiety that this does not provide a
fair period for companies to respond and incorporate the new rules into their practices. My understanding is that the Government say that the new arrangements merely formalise the procedure that is often observed by companies, but all the representations that have been made to me by the industry bodies that I have just named suggest that the legislation goes further than that. There are also questions about the cost to business and the anticipated extra yield to the Exchequer, and about whether the additional money raised will be sufficient to justify the potential additional cost to business.
Those are my concerns, based on my discussions with others. Thinking through these issues as carefully as I can has led me to come up with four brief guiding principles for seeking to address the situation. First, my party believes that we should support measures to improve accountancy procedures in the interest of transparency. Everyone would accept that we want to see companies complying with the law in a transparent way, and not unreasonably trying to avoid their obligations.
I completely understand the Government’s desire to maximise the tax yield within the laws of this country, particularly when we have such an enormous public deficit. The need for the Government to raise money is obvious for all to see. We also recognise, however, that there are many concerns over the wording, the short notice period, the regulatory burden and the personal penalties in schedule 46. It is therefore reasonable to allow this measure to go to Committee, because although the overall objective of greater transparency is reasonable, there will need to be further consideration of those specific points.
The second point relates directly to the amendment tabled by the hon. Member for Fareham, with which I have a lot of sympathy. It is logical to provide for some breathing space in which the rules can be reviewed, so that companies do not fall foul of them unwittingly. Some concerns have been raised with me, however. First, there could be a tendency for some companies—not those that observe best practice, which are unlikely to fall foul of the rules anyway—to see a year’s delay as another year in which they can ignore the problem, and they might not be any better prepared when the legislation comes into force than they would have been if it had taken effect sooner. To be more cynical, one could suggest that other companies could use the year to give themselves more time to think about how to evade the spirit of the law.
Mr. Hoban: The hon. Gentleman is making an important point about how people could use the year’s delay. He will know from reading the Bill that there are two certificates involved: a type A certificate and a type B certificate. Certificate B is used when a company cannot sign off using certificate A and some explanation is required. One concern that has been expressed is that in the first year many businesses will have to file type B certificates anyway, and give an explanation of why they cannot comply, not because they are being difficult or because their systems are not up to scratch, but because of the short notice period. There is a danger of confusing the picture by rushing this measure in with undue haste, without properly identifying which companies are not compliant and which are.
Mr. Browne:
I completely accept the hon. Gentleman’s point, and his honourable intentions. The trade-off that
we always have to grapple with on these occasions is that if a measure has some merit—we all accept that there is some merit in the Government’s proposals—we have to decide how long to delay introducing it in order to ensure that it will work even more effectively. There is a strong case for saying that the added benefit of having a more workable measure will justify the year’s delay in implementation, as the hon. Gentleman’s amendment suggests. However, I believe that such a delay would have potential downsides as well as advantages.
My third point is that I hope the matter will be examined in further detail in Committee. I am sure that the Committee will not seek to remove the clause altogether today, and I hope that I will be able to table amendments in Committee that could reconcile these points, as that might be a more appropriate forum in which to discuss them.
My final point is a broader matter of principle. Objections have been raised about the so-called concept of naming and shaming. I want to put on record the fact that my party is not against naming and shaming per se—the practice might have a part to play—but we want to ensure that it is those who deliberately evade tax who are treated in that way, rather than those who have made a genuine, and in some cases very small, error. The state should not treat individuals and their reputations in a heavy-handed way. If it puts their names into the public arena in a way that damages their career prospects and other private interests, and subsequently finds that that action has been out of all proportion to the offence—which might have been committed unwittingly as well as being modest in scale—it will have exceeded its power in terms of its relative might and the individual over whom it wields its power. We need to observe that important principle in our deliberations. We need to strike a balance between transparency and effectiveness, and between the rights of the individual and the understandable desire of the Government to collect tax revenue legally owed to them.
We accept that there is some virtue in the proposals, but they require considerable further attention, and it might not be desirable to bring these matters to a head this afternoon. After we have heard further representations in the House and externally, we should try to come up with proposals in Committee that are more satisfactory to more people who have a direct interest in these matters.
Mr. Syms: I declare my interest in today’s proceedings on the Finance Bill, as shown in the Register of Members’ Interests.
I agree with the amendment tabled by my hon. Friend the Member for Fareham (Mr. Hoban). His proposal is very sensible, given the speed with which the Government are trying to rush through the measure.
Although I have a number of questions, I am glad that the Minister has already said that he will tell us House more about the definition of a large company, because that will be useful for our debate. Under the provisions, a company will have to notify Her Majesty’s Revenue and Customs of the name of its senior accounting officer. I assume that it will also have to provide the company’s address, but will it have to provide all the
company’s addresses for which the officer is responsible? Will he or she have to give their home address, as they will have some personal responsibility for what is discharged? Will the individual in question have to be resident—could they be a non-dom? These are important questions. HMRC does not require people to have DNA tests, but you never know.
We have to be very careful when setting out what we want from senior accounting officers. We have already discussed subsidiaries, including overseas subsidiaries and those that are sometimes set up for particular financial transactions, such as the purchase of plant, and I think that there are difficulties involved in that. I also think that there are difficulties involved in the appointment of a new senior accounting officer. The first thing that he or she will have to do is go through all the accountancy procedures and conduct a risk analysis of every part of the business. In the case of large companies, that could not be done particularly quickly. We shall need to see HMRC guidance on what senior accounting officers have to do.
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We know that there will be penalties for inaccuracies, but it would be useful to be given a definition of what would be considered an inaccuracy. In any large organisation it is possible to make small mistakes involving minimal amounts of tax, and no sensible tax authority will take everything to the nearest penny. However, the individuals living under this regime will need to know about scale. In the case of large or significant tax liabilities, that would seem to be a sensible requirement.
We are told that there will be a fine of £5,000 a company per year. If 20, 30, 50 or 150 companies were involved, could a multiple fine be imposed on a company and its subsidiaries, and could it be imposed over multiple years? What is the potential liability faced by individuals? As I said earlier, this is a bit different from limited liability. Could the fines be levied by HMRC, and is there an appeal process? According to the explanatory notes, a “reasonable excuse for...failure” will be accepted as a reason for HMRC not to levy fines, but we do not know how HMRC will be persuaded that an excuse was reasonable. There might be an argument between the tax authorities, which must discharge their responsibility to collect as much money as possible, and the company about what is reasonable.
We need to know much more about the costs imposed on businesses. Even if the Minister qualifies what the impact assessment says about company size, I shall want to know whether the costs will be reduced for smaller companies. Will HMRC insist on the provisions applying to all limited companies at some point, and what impact would that have?
We need much more information about clause 92. I think that it would be very useful if the amendment were accepted so that the implementation of the schedule could be delayed to allow proper consultation. It is important not to reduce the responsibilities of members of boards, and indeed those of auditors. My hon. Friend the Member for Fareham might agree that auditors quite often avoid their responsibilities nowadays, and that many of our financial problems might be caused by that.
There are a great many questions to be answered. I hope that the Minister can reassure us and that, by the
time the Public Bill Committee sits, we shall have much more published information so that we can test the Government’s proposal. We know that it is important to raise legitimate tax from companies, and the American example might be a useful one, but I shall not be in favour of the proposed arrangement unless I am given a great deal more information about the impact on business and individuals, and about the Government’s direction of travel.
John Howell (Henley) (Con): Consensus is emerging on the need for a transparent financial and accounting system. There might be a need to improve and tighten up tax accounting arrangements, but I am not convinced of the merit of the Government’s approach. The question that I am still asking is, “Why now?”
The hon. Member for Coventry, North-West (Mr. Robinson) described some ways in which pressure could be put on finance officers in the banking system, but I do not think he was suggesting that there was any evidence that that had already happened. While his observations were valuable as theoretical points, they left me still wondering what specific evidence had led HMRC to require clause 92 to deal with an existing problem. It would be helpful if the Financial Secretary could return to that question.
Mr. Geoffrey Robinson: What the hon. Gentleman says about my comments is pretty well true, but given the entirety of what has happened to investment and other banking systems in America and here, it is hard to escape the conclusion that not just the risk element but the overall finance control system in those banks was nowhere near strong enough.
John Howell: That is a valid point, but I am trying to establish whether there is a causal link between what happened to the banking system and the introduction of clause 92. So far I have seen no evidence of that, or of a causal link with other things that have gone wrong.
Mr. Syms: The hon. Member for Coventry, North-West (Mr. Robinson) made a good point about the banks. The views of accounting officers on the company and its reports might depend on whether they were in line for bonuses.
John Howell: As usual, my hon. Friend makes an interesting observation.
I was not sure whether the hon. Member for Coventry, North-West was saying that it was not a good idea to consult before provisions were inserted in a Bill because that would lead to the distortion of those provisions, but if that were the case, I would not see the point of consultation at all. His argument undermines the whole process and casts an unnecessary pall over what I consider to be the positive and mature way in which organisations such as the Institute of Chartered Accountants have approached consultation on a range of issues with a number of bodies, including the Government.
Mr. Robinson:
My basic premise is indeed that it is better to invite consultation once the purpose of proposed legislation has been stated but, as I tried to explain to the hon. Member for Fareham (Mr. Hoban), the corollary
is that the Government must be prepared to amend legislation, realistically and willingly, in the course of the consultation.
John Howell: That is an interesting point, but I do not believe that the trust that is necessary between the bodies being consulted and whoever is consulting them will be strengthened by the fact that they are being consulted only when the structure and philosophy of legislation has already gone quite a long way down the road.
Let me say a bit more about philosophy. The hon. Member for Wolverhampton, South-West (Rob Marris) made a valid distinction between the philosophical differences between the approaches to the clause adopted by the two sides of the Committee which, I think, are exemplified by paragraphs 23 and 24 of the explanatory note on clause 92. Paragraph 24 establishes what we consider to be the better principle-based approach in stating:
“Ensuring appropriate tax accounting arrangements are in place is no more than compliant companies will be doing already.”
There are two points to be made about that.
“Ensuring appropriate tax accounting arrangements are in place”
is the principle that we would expect to underlie the clause, while the words
“is no more than compliant companies will be doing already”
raise the question of why the clause is needed at all. What evidence will there be of the number of non-compliant companies, and how is that number to be established?
Paragraph 23, which the hon. Gentleman quoted, states:
“Currently, there is no legal obligation on any particular director...to ensure that the company has appropriate tax accounts arrangements.”
To me, that illustrates a tendency towards a rules-based system which, in my view, has a number of negative effects on companies’ positive approach to organising their affairs. I am in the principles-based camp; I do not think that we should tie things up unnecessarily.
I wish to turn to the Sarbanes-Oxley Act comparison, because a number of issues arise there. Given that a comparison has been made with that measure and that reliance has been placed on the experience of it, I wonder whether any reasonably substantial and detailed work has been done to examine its effects. It is fine to talk in terms of generalisations and broad comparisons, but we need detailed experience if we are going to rely on it. We have seen one aspect of how that measure could materially affect companies: the additional costs and obligations that it puts on them. I understand that the accounting profession takes the firm view that additional costs arise from the measure.
The other issue that Sarbanes-Oxley raises has already been touched on in relation to materiality. The Act introduced something related to financial accounting rather than to tax accounting. As I understand it, built into that system is a concept of materiality. We need an indication from the Minister as to whether we are now accepting the concept of materiality in tax returns as well as in financials.
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