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.
12
noon
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.
Mr.
Hoban: That is correct. The exclusion for limited
liability partnerships is set out in the guidance notes: they are not
companies as defined by the Companies
Act. My former employer, PricewaterhouseCoopers, would be excluded, as
would my hon. Friend the Member for Henley, who was a partner. My hon.
Friend the Member for South-West Hertfordshire has worked for a firm of
solicitors—another partnership. If it met the criteria, it too
would be excluded. A wide range of significant businesses will be
excluded as a result of the carve-out for partnerships.
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. 12.15
pm
| 
