Appendices: The Corporate Tax, VAT, Employment Tax and Customs perspectives
- The Corporate Tax perspective
- The Employment Tax perspective
- The VAT perspective
- The Customs perspective
As the corporate tax compliance process already depends on the quality of the source data, as well as the preparation and submission of the tax return, it could be said that this tax is perhaps the one in best shape for SAO compliance. In addition to this, corporation tax processes are generally centrally controlled by the tax team and they have more time to rework data in the period between the original transaction and the filing of the return , whereas the timeframe for Customs and VAT is much shorter.
With this in mind, many companies are preparing for SAO from a corporate tax perspective by 'kicking the tyres', and checking that their systems and processes remain in good working order. For example, checking the tax sensitisation of the chart of accounts, or checking that agreements with HMRC around percentage disallowances of legal and professional fees are still appropriate.
However, SAO has heralded a new, high profile change to the tax landscape. New CFOs will need to examine the state of SAO compliance activity and documentation of the company that they are joining. For existing CFOs, providing their personal sign off that reasonable steps have been taken, may lead to them requesting further work to ensure compliance.
Loss of key personnel is one issue to consider from a corporate tax perspective. If no contingency plans are in place, one person may hold the keys to a process, and this may not be documented. This would be seen as not taking reasonable steps under SAO.
Businesses are increasingly operating in overseas jurisdictions, implement and run more complex reward structures, and payrolls are increasingly operated offshore. In addition to this, the regulatory environment is tightening with more demands on employers to report and disclose around employment taxes functions. All this makes the basic management of employment taxes compliance more complex than it may have been in the past.
To add to these challenges, employment taxes processes and functions are often spread across various parts of an organisation. It can therefore be difficult to identify roles and responsibilities for employment taxes obligations, and a lack of clarity around this can lead to increased compliance risk. Furthermore, if the systems in place are not capable of supporting the employment taxes function from both a process and risk perspective, this can increase the level of that compliance risk, leading to compliance failures.
Our recent survey found that around one third of the respondents were most concerned about employment taxes in the context of their SAO sign off. Through our experience, we’ve identified some of the employment taxes risk indicators that may impact your SAO certification:
- A business with a divisionalised group structure where there is no central employment tax management or oversight;
- Rapid growth businesses where the employment taxes compliance infrastructure has not been able to keep up with the speed of growth in the business;
- Mature businesses with an internationally mobile workforce and complex remuneration structures.
- There are no documented employment tax policies and procedures in place;
- Staff inputting data are not adequately trained to understand the tax impact of data being incorrectly classified;
- No central control framework - no one person taking responsibility for overall compliance across the entire spectrum of employment taxes.
- Lack of automation in the payroll process and lots of manual input required;
- IT systems are unable to provide sufficient functionality e.g. a new accounting, or payroll system not being tax sensitised;
- No monitoring or oversight of systems, and no ongoing review of systems against legislative changes.
Generally speaking, indirect tax managers may have been feeling more comfortable regarding their contribution to SAO compliance, as many have been through the process of Sarbanes-Oxley compliance in the recent past. However, it is worth noting that for the purposes of Sarbox, VAT and other indirect taxes may have been scoped out as it was deemed immaterial. In any case, being Sarbox compliant is no guarantee that a company is SAO compliant for VAT purposes.
From our conversations with clients around SAO, we have drawn together a list of common VAT areas that could demonstrate weakness in SAO compliance:
- VAT figures are generated straight from the accounting system and there is often less oversight from the tax team on the actual numbers as opposed to, for example, corporate tax where the in-house tax teams are hands on. In addition, VAT has to be dealt with on a real time basis meaning there is little time to review and amend the accounting figures.
- Often indirect tax managers have little control over the numbers; accuracy can depend on Accounts Payable staff correctly inputting and classifying invoices. There is often a disconnect between what the indirect tax managers think should happen and what actually does.
- VAT can often be coded, apportioned or reclaimed incorrectly; however errors are generally more quickly identified both by the in-house teams and HMRC.
- Foreign currencies can often present problems, for example, where supplies are priced in dollars but VAT is paid in sterling, the wrong currency may be input into the accounting system.
- Often issues can arise because corporate tax and VAT personnel do not communicate e.g. regarding transfer pricing or property transactions but also vice versa, if for example a VAT structure is not run past the corporate tax team.
- Shared service centres (SSC) may be responsible for numerous countries and currencies, so there is a challenge in keeping the SSC employees’ understanding up to date, especially when there are frequent changes in the tax rules and SCC personnel.
Customs duty is often the ‘forgotten’ tax as there is confusion around who is responsible - is it finance, logistics or tax? Equally, customs is frequently bundled with VAT in the accounting system, so it is not separately identified despite customs duty being a bottom line cost.
From a customs perspective, there are a number of other circumstances that could make SAO compliance difficult. Customs is often outsourced to an agent, usually a freight forwarder, who will complete the customs declaration. The importer/exporter however remains fully liable for the accuracy of customs declarations made in its name, and risk may increase as visibility and control of the declaration process are given to third parties. Often companies have no agreements in place with their forwarder in terms of compliance management or key performance indicators, and occasionally they may have no contractual relationship at all with the agent, so there is little or no recourse if a mistake arises. Also, procurement of goods can be a few months before shipping and duty is only levied on import, so there is often a time lag in appointing agents.
What are potential areas of weakness around customs that could cause problems for SAO compliance? Speaking to our customs specialists, we identified the following:
- No customs policy, or inadequate processes or procedures in place;
- No customs training for staff;
- No customs-related roles and responsibilities defined and agreed;
- Not knowing which department is responsible for customs;
- Lack of control over third party service providers;
- Duty invoices are not checked for accuracy.