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Mr. Bone: Am I to understand from my hon. Friend’s well argued comments that it would be possible to have a senior accounting officer who was not a board member and was junior to the people sitting on the board, but who took all the flack while the board member escaped? Are the Government giving an opt-out to board members?
Mr. Hoban: My hon. Friend hits the nail on the head. That is what is happening. The flexibility means that the responsibility for certifying the appropriateness of the tax accounting arrangements could pass from a board member to somebody more junior in the company—rather than the finance director, it might be the financial controller or a financial accountant, tax director or tax manager. There are others to whom the duty could be allocated who are not main board directors. I think that we ought to focus responsibility on the board rather than on more junior staff. The people at the top of the organisation, who have to certify that the accounts are true and fair, are the people taking responsibility for the tax information as well as other financial information. The Government should think about that point carefully because it is important, as I said, to focus responsibility on the boards.
The Government amendments would restrict the number of companies that fall within the measure. When we debated the matter earlier, the Financial Secretary acknowledged that that was something that should happen. I am pleased that the definition is in the Bill and not in regulation and that it is based not on some administrative term within HMRC, but on objective criteria. We all know that HMRC terms change from time to time. A company that is subject to customer relationship management today may not be in 10 years’ time, or a wider range of companies may be caught, so it is important that there are objective criteria. I am interested to know how many companies are involved. When we debated the matter in Committee of the whole House, the criteria used in the Bill were drawn up with reference to the Companies Act 2006. A large company would have to satisfy two of the following three criteria: a turnover of more than £22.8 million, a balance-sheet total of more than £11.4 million and more than 250 employees.
At the time, the regulatory impact assessment suggested that 3 per cent. of all large incorporated companies would fall within the 60,000 companies defined in the 2006 Act. However, in putting together the RIA, the Government suggested that many companies were parts of groups and so whittled down the number of companies needing to appoint a senior accounting officer to between 1,600 and 2,000. Will the Minister give us another estimate of the number of companies that fall within the new category? The qualifying criteria are now, according to amendment 296, a company with a turnover exceeding £200 million or a balance-sheet total exceeding £2 billion. It would be helpful if the Minister told us how many companies fall within those criteria. I also wonder whether it is feasible for the Treasury to tell us the names of the companies that fall within the criteria. Having identified the criteria, it must be relatively straightforward to understand which companies are affected.
Although the size criteria help, it is not clear how big a difference they will make compared with the statements that were made justifying the RIA when the measures were first published. That is why I asked the question about the cost-benefit analysis. Was it based on the type of companies that are now caught, or was it based on the wider pool of companies that was envisaged at the time of the regional definition? As I said to the Minister in my intervention, there are other carve-outs from the scope of this measure. It excludes partnerships. On one level, I can understand that because it deals with the circumstances in which a company is owned by a private equity company. For example, the partnership exclusion means that the limited partners at the top will not have to report on the accounting provisions of the companies it owns. As a result, only portfolio companies that meet the criteria will have to appoint a senior accounting officer. However, that excludes some large businesses that are partnerships—for instance, John Lewis Partnership would not be covered—and if there was a partnership within a group, the partnership itself would be carved out.
I am not sure what the consequence would be in practice. It is in the guidance notes, but it seems to me that if the accounting arrangements for one part of the business were not entirely certain, the company might try to hive it off into a partnership.
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Mr. Bone: My hon. Friend makes an important point. Am I right in thinking that most of the large accounting firms are partnerships? If so, they would not need to appoint a senior accounting officer, which seems rather bizarre.
There are sensible reasons why partnerships should be carved out—for example, the provision would impose upon the limited partner in a private equity firm an obligation that probably could not be carried out. However, the provision goes some distance beyond that by excluding retail or professional partnerships. It would help if the Minister were to clarify why these businesses should not be included, and why they are carved out. Does she believe that they are inherently low risk? If so, why are other low-risk businesses not carved out?
We need some explanation for the inconsistencies on which businesses are carved out. I go back to my earlier point that part of the problem is that the Government did not think the matter through. The provision was included in the Bill at a late stage, perhaps on a whim. I do not know what whim it was meant to satisfy; perhaps someone felt good trying to tackle some of the tax measures that companies take, without thinking through the process or of what the outcome would be. We need some explanation of why partnerships and mutuals are excluded.
The Minister also sought to deal with the question of foreign companies. Branches of foreign companies are excluded from the provision. I know that Deutsche bank in the UK is established as a branch and that many European financial services businesses are based here under a branch structure. The Economic Secretary and I have discussed before the question of passporting, which enables companies incorporated in other European economic area member states to operate through a branch structure in the UK.
The Minister spoke of ensuring that the balance sheet totalled more than £2 billion, to ensure that the banks were picked up. I suspect that the balance sheet of the UK branch of Deutsche bank would meet the criteria. I suspect that it is quite a big taxpayer, if only through the tax paid on staff salaries, bonuses and so on, the VAT paid on purchases and the stamp duties paid on share transactions, but it has been excluded. The Government need to state more clearly the nature of the exclusions. A group with its headquarters in the UK has to sign off tax returns and give the declaration required under schedule 46, but I am not sure how it would be able satisfy itself about the operation of overseas subsidiaries. We shall come to later to how the materiality exemption in the later amendments could help those companies, but it is clear from the guidance notes that the materiality level to which the Government refer is not the materiality that is used in sets of statutory accounts; it is a different, unspecified level of materiality.
What expectations do the Government have of people in UK-headquartered groups being able to sign off the way in which tax is dealt with in their overseas subsidiaries? A company in the UK that is part of an international group may fall within the regime and be required to understand the tax accounting elsewhere in the group. The senior accounting officer would have to attest to the sufficiency of not only the UK company’s accounting arrangements, but those of the worldwide group, and he may have little practical or technical knowledge of that.
Some significant concerns arise from the tighter definition in the group of amendments. To put the matter beyond doubt, I am not arguing that the measure should be extended to cover branches, partnership or mutuals. I am trying to understand why they are excluded, because that will give some insight into the Government’s thinking on the purposes of the measures. We debated the matter in Committee of the whole House and there are more issues to be teased out in this Committee. Depending on the Minister’s response, we may return to it on Report.
John Howell: The guidance notes on the schedule are extremely revealing. They state that there was previously no requirement on anyone within a qualifying company to ensure that the underlying tax accounting arrangements were fit for purpose. They go on to say that this measure addresses the accountability gap. There is a huge gap between the logic of those two statements, so it would be good to have clarification on that.
There could be a situation in which a number of different people were responsible for this in a company. The fact that more than one person was involved would not equate to a gap. A gap is an absence of something, and we are yet to hear that there is the real gap to which the guidance notes refer.
The Minister referred to the risk-based approach of HMRC on this matter. I have a point that follows on from the remarks made by my hon. Friend the Member for Fareham about understanding where the detail of the schedule came from. I get the feeling that it emerged out of HMRC’s risk framework document. I have put together risk framework documents in the public sector, so I know that one must identify all possible risks that might occur. It would be extremely useful to know where this risk occurs in the HMRC risk framework and what weighting it was given before a conclusion was reached. Our concern comes from the guidance note in paragraph 58.
Mr. Bone: I am struggling with the concept of a huge gap in all these large companies that is ruining their tax affairs. How can the auditors in those companies sign off a certificate to say that the statement of affairs shows a true and fair view? Is this a sledgehammer cracking a nut when there was no nut to crack in the first place?
John Howell: My hon. Friend makes an extremely good point. He has amplified my point that we are yet to be convinced that there is a gap at all. If there was a gap, we would have expected to have heard about it from the auditors of major companies. It is inconceivable that companies of the size we are discussing would allow such a gap to continue.
Paragraph 58 of the guidance notes deals with interaction with other countries’ requirements. It mentions two countries: the US and Japan. It ends by saying that a company that is compliant with the Japanese requirements may derive some comfort that the Japanese procedures go some way towards satisfying the reasonable steps required by the schedule. I cannot imagine that anyone in that situation would get any reasonable comfort from such a statement. It would be extremely helpful to understand what the Exchequer Secretary sees as the principal differences between what is set out in schedule 46 and what is set out in the Japanese and US arrangements.
My final point relates to the interaction of the schedule and the charter that we have just been examining. It seems to me that the schedule conflicts with the charter, particularly on point 2, which is called “Treat you as honest”. It says:
“We know that most people want to get things right. Unless we have a good reason not to, we will”,
and it goes on to list a number of things, one of which is:
“presume you are telling us the truth”.
The schedule goes completely against that. We have had no good reasons advanced as to why a different treatment to point 2 of the charter should apply. The schedule is clearly not treating the companies as being “honest”. We have already seen the first of the holes that have been driven through the charter.
The second element of the charter that the schedule goes against is point 9, which says that HMRC will do
“all we can to keep the cost of dealing with us as low as possible”.
I heard the Minister say that the process will not raise too many costs on the part of companies. I simply do not believe that that will be the case. There will be additional costs, but no justification for them has been given.
Mr. Hoban: My hon. Friend’s point about costs is right. One of the issues here is that companies that are already compliant, or those that are assessed as being low risk by HMRC—there is a risk-assessment process that HMRC has undertaken for these large companies—will end up incurring unnecessary additional costs.
John Howell: My hon. Friend is right. These costs will be additional costs that a company will incur, on top of what it is already paying, simply to meet the reporting requirements.
Point 2 in the charter goes against point 3 of the taxpayers’ duties, which is about takings reasonable care when they compute their tax returns. That shows that there is no trust in the company that is going through the process of putting these details together.
For those reasons, there are huge gaps in our understanding, which I hope that the Minister will fill. These are real gaps, unlike the accountability gap, in that there is absolutely nothing to provide me with any comfort.
Sarah McCarthy-Fry: I thank hon. Members for their contribution to our discussion of these amendments. I will try to address all the points that have been made.
The overarching point is that the majority of large companies already have appropriate tax accounting arrangements in place. I do not accept that this measure will put an additional burden on them.
Mr. Bone: Will the Exchequer Secretary be more specific when she says “the majority”? How many companies does she think do not have adequate tax accounting provisions?
Sarah McCarthy-Fry: I cannot give the hon. Gentleman numbers, but I can say that there have been large companies whose tax computations are calculated incorrectly each year, due to known problems in the accounting system. One group of companies had system problems every year. They could not identify the source of the problem or satisfy HMRC that the tax computation was correct. The measure is intended to encompass the small minority of large companies that do not have those systems in place. For those companies, it is difficult for either the company or HMRC to know whether the right amount of tax is being paid.
Mr. Hoban: The example that the Exchequer Secretary cited was exactly the same example that the Financial Secretary gave to the Committee of the whole House. I asked him then if he could say how much tax had been lost in these circumstances and he could not give me an answer. Will the Exchequer Secretary give me an answer to that question now?
Sarah McCarthy-Fry: I do not have that information to hand but, if it is available, I will be happy to write to the hon. Gentleman.
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