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It would be useful to understand a bit better the way in which what is required by the clause will interact with the existing accounting framework. Most accounting
systems comply with UK generally accepted accounting principles, but are we now saying that changes will be needed to UK GAAP to reflect the tax aspects of the measure? Are we saying that, for tax purposes, we will need additional requirements above UK GAAP? The measure does not address the question of integration within one system and how we judge, in terms of the prospect for revenues, other accounting regulationsnot just UK GAAP but overseas regulations.
Mr. Timms: We have had a useful discussion on this important measure. In the Budget, the Government took difficult decisions to support fiscal consolidation, taking steps to support businesses and households, but also setting out the credible path that we must follow to return public finances to sustainability in a fair way. Protecting tax revenues is an important part of that. It is right that as part of our fiscal consolidation, we act nowI recognise that there is some urgencyto lock in tax compliance and to protect tax revenues.
The majority of senior accounting officers are already ensuring that appropriate tax accounting arrangements are in place in their companies or groups. For them, the burden of the new requirement will be minimal, requiring little more than to certify the existence of what is already in place. However, a minorityI think it is quite a small minorityof companies do not have robust systems and processes in place. It is difficult for either the company or HMRC to know whether the right tax is being paid. We want identified individuals to take responsibility for putting that right. I will give a couple of examples.
Mr. Timms: Let me give the hon. Gentleman the examples that I have in mind. There have been companies where tax computations are calculated incorrectly each year due to known accounting system problems. We want it to be clear whose job it is to sort that out. One group had systems problems every year, could not identify the source of the problems and could not satisfy HMRC that the tax computation was correct. It needs to be crystal clear whose responsibility it is to resolve such an issue. Therefore, this is not about human error or genuine mistakes, as paragraph 1 of schedule 46 makes clear. It is about systems problems leading to persistent under-reporting of tax.
Clause 92 therefore places a legal obligation on senior accounting officers to establish and maintain appropriate tax accounting arrangements. It builds on the approach that HMRC has been taking since the 2006 review of links with large business, which I think has been widely welcomed, enabling companies to work with HMRC and to establish a low-risk tax relationship through transparency, picking up the point rightly made by the hon. Member for Taunton (Mr. Browne), and through co-operation. Clause 92 simply provides that existing good practice among the majority of large companies is
spread across all large companies. The measure reflects what should already be in place. We are clarifying the responsibility for ensuring that tax accounting arrangements comply with established good practice.
As we have established, the detail of the measure is set out in schedule 46, and I look forward to the full debate that has been presaged in this exchange, when we will discuss the detail in Committee. We said at the Budget that we would move quickly to consult on detailed implementation. I recognise some of the concerns that have been expressed in this debate; indeed, they have been raised with me. In response, we will table amendments to schedule 46 in Committee. I agree with my hon. Friend the Member for Coventry, North-West (Mr. Robinson) that that is the right way to deal with these matters. Let me outline the amendments that I envisage tabling.
First, as I said earlier, we need the right balance between safeguarding revenues from larger companies and the compliance cost for business in terms of what counts as a large company. I am now satisfied that the base of companies within the scope of the measure can be narrowed to strike a better balance. Our current thinking is to limit the measure to those companies with a large business relationship with HMRC, and a customer relationship manager reflecting thatfewer than 2,000 companies in total, compared with about 15,000 under the definition set out in schedule 46 as drafted. We will have further discussions about that approach before we take a final view, but we will then table amendments in Committee, rather than introduce regulations under paragraph 17 of the schedule.
Secondly, schedule 46 as draftedthe hon. Members for Fareham (Mr. Hoban) and for Taunton commented on thisrequires senior accounting officers either to certify that the companys tax accounting arrangements are appropriate or otherwise to explain the respects in which those arrangements are not appropriate, with different certificates for each of those two cases. I am now satisfied that that would work better with a single certificate, on which the senior accounting officer sets out either one position or the other, rather than two different types of certificate as provided for in the draft schedule.
I accept that the requirement to notify the companys auditors as well as HMRC of the respects in which the tax accounting arrangements are not appropriate could pose operational difficulties for businesses which are disproportionate to the importance of that measure, so an amendment will be tabled in Committee to remove that requirement from the schedule.
the director or officer of the company who has overall responsibility.
I think that it should be a director; it should not just be an officer, who could be below board level. I want the focus to which I referred in one of my interventions on the generous hon. Member for Fareham (Mr. Hoban).
Mr. Timms: I will certainly reflect on that, but it should be for the company to determine who will have the overall responsibility that the schedule sets out, so I would be hesitant about being more prescriptive.
Mr. Geoffrey Robinson: The point of the person being on the board, as opposed to being an officer, is that being on the board carries certain specific personal liabilities. The chief financial officer or the person with tax responsibilities might in many cases be taken off the board precisely so that they avoid that sort of responsibility, which a directorship carries with it. Will my right hon. Friend undertake to look into this point?
Mr. Timms: I will be very happy to reflect on it, but it should be the company concerned that makes the judgment as to which individual should carry this significant personal responsibility, which is rightly set out in this part of the Bill.
The hon. Members for Fareham and for Taunton asked when guidance would be ready, and I agree with them about the importance of getting the technical guidance right. The legislation must be implemented in a way that is consistent with the intention that I have set out. There should be minimal impact on companies and their senior accounting officers who already have robust systems in place, and HMRC is having some good discussions with those involved. It will work with them to develop and agree the guidance, and I will ensure that draft guidance is with the Committee before it considers the schedule.
The hon. Members for Fareham and for Henley (John Howell) talked about the reference to Sarbanes-Oxley in the impact assessment, and I understand why they did so, but we need to make it clear that we are not here importing Sarbanes-Oxley legislation to the UK. Sarbanes-Oxley is very extensive and covers a far wider range of issues than the quite limited measure in question, such as corporate governance, financial reporting and company law, rather than tax. No specific element of Sarbanes-Oxley is replicated in clause 92 or schedule 46. There is an analogy in that an element of personal responsibility is a characteristic of both the Sarbanes-Oxley legislation and this measure, but none of the specific Sarbanes-Oxley measures is replicated here.
Let me pick up on some of the other points that have been raised in the debate. I hope that former accountants enjoying their retirement in Sandbanks and elsewhere will be reassured to learn that because the obligations imposed apply only in relation to financial years beginning on or after Royal Assent, there is no question of any senior accounting officer being held retrospectively responsible for any shortcomings in a companys tax accounting arrangements.
I have mentioned one set of regulations that the draft schedule gives us the power to introduce: those to restrict the number of companies. As I have made clear, we will not be introducing such regulations, because we will take the action through amendment instead. We will be able to bring forward in draft form the other set of regulations, on penalties, that schedule 46 allows us to introduce before we reach that part of the debate in Committee.
The Government should be able to expect senior accounting officers to be satisfied that they have the appropriate systems in place to ensure that they can submit accurate tax returns. As I hope I have suggested, there is a problem, which clause 92 addresses.
Will the right hon. Gentleman comment on the issue of materiality? We discussed this point
earlier in the context of the materiality that auditors use to sign off accounts. What level of materiality will HMRC employ when looking at the appropriateness of tax accounting systems and the accuracy of returns?
Mr. Timms: As the hon. Gentleman knows, companies already have an obligation to deliver correct and complete returns. The measure ensures that the minority of senior accounting officers who do not oversee systems that generate correct and complete computations take responsibility for addressing that. That is the level of the bar that we envisage applying.
Mr. Hoban: There may be a systemic problem in a system that means that the calculation of tax on each transaction is out by as little as a penny or as much as a pound, and clearly those different amounts will have a different impact on the tax liability. How precise does the Revenue expect to be in applying these sanctions to senior accounting officers?
Mr. Timms: That is a perfectly fair point and we will certainly need to address it in the guidance, but what is important is that this is about ensuring that the systems are sound and robust, rather than about the dangers of mistakes that might from time to time occur.
Mr. Timms: I do not know the precise figures in that case. The hon. Gentleman mentioned the figure that we set out in the Budget documentation on Budget yield over the next few years arising from this measure. We estimate that in the first year there will be an additional tax yield of £40 million, and a rather larger sum in the years after that. Cumulatively, we are therefore talking about significant sums, and this is an important contribution that is needed for the fiscal consolidation that we require.
Mr. Geoffrey Robinson: There is a natural preoccupation that systems should be robust, but it has always struck me that systems can be as robust, detailed and complicated as we like, but they are only as good as the people who operate them. It is good that this complementarity has been introduced. Systems must be robust, but in order to make sure that they work properly, the first officer responsible has to see to it that the sanction and responsibility put on them will achieve just that end.
The hon. Member for Taunton is right that it does not make sense to defer this measure for a year. There are certainly some detailed measures that we need to introduce and debates that we need to have, and as I have signalled, some amendments will need to be tabled. There would, of course, be a cost in deferring for a year. We need to get on with it, and the Governments response in terms of the fiscal consolidation we have set out needs to proceed. I therefore hope that the hon. Member
for Fareham and his hon. Friends will feel able to withdraw their amendment. If they do not, I hope the Committee will reject it.
Mr. Hoban: I am not convinced by the Financial Secretarys response to the debate. He talks about what we are considering being an appropriate measure of fiscal consolidation that will raise £40 million in the first year. This is in the context, of course, of a budget deficit of £175 billion. I asked him about the monetary amount of the systems error that he prayed in aid in respect of this measure, but he did not know how much that was going to be. I worked out, not in a systematic way but on the back of a notional fag packet, that the amount involved per business covered by this measure would be £30,000 to £40,000, which is not a material sum. I am just not persuaded yet that the Financial Secretary has made a case as to why we should impose this legislation on large businesses, notwithstanding the welcome concession that he has made in restricting the number of businesses to which it will apply. Why would this measure be imposed without any real work having been done by the Government on the costs that businesses will incur as a consequence of its introduction?
The hon. Member for Coventry, North-West (Mr. Robinson) takes a very bullish view on consultation, and it is important that we get tax legislation right. The Financial Secretary has accepted that there will be amendments in Committee, and I welcome that. However, there are examples of legislation that has been rammed through quickly and which we have had to come back to in successive years to get right, and I just do not think that the Government have taken sufficient care over this measure to warrant its introduction when this Bill receives its Royal Assent some time in July. More work needs to be done by the Government to get this right, and to understand issues associated with materiality, who the senior accounting officer will be and the application of this measure. It is right to delay implementation by a year, so that the Government get it right and do not impose an unnecessary cost on business without a firm grip on the benefits that this is due to bring. I therefore ask my hon. Friends to support amendment 4.
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