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The year ahead

From new tax penalties to adopting a more commercial mindset towards compliance, Deloitte reviews five critical issues that are on the Channel Islands’ business agenda for 2018.

Don’t fail to correct


Alison Vine, Director, Tax

The ‘Requirement to Correct’ (RTC) and the subsequent ‘Failure to Correct’ (FTC) regimes apply to anyone with unpaid historic UK tax liabilities relating to overseas assets. This provision therefore potentially affects offshore trustees, UK resident and domiciled individuals and UK resident non-UK domiciled individuals. It applies equally to those who have deliberately evaded tax and those who have failed to pay the correct amount of tax through oversight or careless error.

The RTC offers a final chance, before 30 September 2018, to correct historic offshore tax evasion but also non-compliance. It includes all periods up to and including 5 April 2017. Income tax, capital gains tax and inheritance tax may be reported under the RTC.

The end date of 30 September 2018 (and the start of the FTC regime) corresponds with the date by which all countries committed to the Common Reporting Standard (CRS) will be exchanging data with HMRC. From this point, any disclosure of undeclared liabilities will be considered to be prompted.

Where historic errors are not corrected in the RTC period (6 April 2017 to 30 September 2018), taxpayers will face much tougher new penalties.

To avoid the financial and reputational risks associated with FTC, trustees should ensure that their UK tax affairs are in order before 30 September 2018. This could entail undertaking thorough tax reviews of their structures to identify any potential outstanding tax issues.

New AML Handbook 2018 - Actions for the Board


Sally Rochester, Director, Advisory

The consultations for the revised AML/CFT handbook have closed with more than 70 responses from across the industry. Feedback from the Regulator at recent industry presentations indicated that a further draft would be sent out to industry bodies and respondents in the spring of 2018 with a view to issuing the final handbook shortly thereafter.

The draft handbook is not expected to materially change so businesses would be wise to start to consider how they will approach implementation as they look forward to 2018. Whilst no business wants to let their attention drift from commercial considerations, the Board should see this as an opportunity to reassess the effectiveness of their wider financial crime risk management framework.

It is clear that the Board’s approach sets the tone for financial crime risk management across the organisation. When reviewing your risk management framework next year it would seem wise to take the opportunity to consider whether other Board-level statements and controls are fit for purpose. Is the Board satisfied that:

  • The business financial crime risk appetite and financial crime business risk assessment are fit for purpose;
  • Sufficient information is received from the MLRO to be able to evidence that they can reasonably conclude on the effectiveness of the financial crime risk management framework in place;
  • They adequately document their consideration of the information presented by the MLRO on a periodic basis; and
  • They record action taken to mitigate any weaknesses in risk management identified and track those actions to ensure adequate mitigation of the risk identified.

It was noted by the GFSC that where the risk appetite statement is clear, generally it follows that the financial risk management framework is effective. In our experience an informed debate at Board level about the business’s risk appetite and control framework can pay huge dividends. We can facilitate such debate through a workshop and drawing on our extensive experience of financial crime risk management across the industry.

The Audit Agenda - Financial Reporting - 2017 Annual Reports


Stuart Crowley, Director, Audit

There are a number of significant financial reporting issues affecting 31 December 2017 reports which Boards need to consider and action. The three main ‘hot’ topics are:

  • The appropriate use of ‘Alternative Performance Measures’ in reporting financial performance, with due prominence given to IFRS measures;
  • Disclosure of the impact of new accounting standards, particularly IFRS 15 on revenue and IFRS 9 on financial instruments, with the FRC expecting a ‘step change’ in disclosure compared to previous years;
  • Proper disclosure of the judgements and estimates applied in preparing financial statements, including clear differentiation between the two, using company-specific disclosures and avoiding boilerplate.

The Financial Reporting Council (FRC) has recently announced its 2018/19 corporate reporting thematic reviews. These will focus on:

  • Targeted aspects of smaller listed and AIM-quoted company reports and accounts;
  • The effect of the new IFRS on revenue and financial instruments on companies’ 2018 interim accounts;
  • The expected effect of the new IFRS for lease accounting; and
  • The effects of Brexit on companies’ disclosure of principal risks and uncertainties.

The FRC has indicated that it will write to 40 smaller listed and AIM-quoted companies before their year end, informing them that it will review two specific aspects of their next published report and accounts. These specific aspects will be drawn from five areas of FRC focus that have featured in recent thematic reviews.

Is 2018 the year for compliance to adopt a more commercial mindset?


Sally Rochester, Director, Advisory

The majority of businesses see regulatory compliance and effective risk management as an essential part of their business strategy. However, all compliance professionals will be conscious of budgetary constraints and increasing pressure to deliver effective compliance at minimal cost.

Few companies have begun to measure the cost of compliance across the business. In fact, our recent survey highlighted that very few Heads of Compliance are aware of the budget allocated to the compliance function and none could articulate the cost of servicing the business.

Isn’t it time to adopt a commercial mindset to compliance, helping businesses to maximise revenues by understanding the cost of compliance by client type, product type and business unit?

Surely the client take-on process should consider the overall revenue projections for a client, including the cost of compliance, before they say yes to onboarding that client?

The language of costs and revenue needs to be employed to demonstrate that the compliance function understands the front line’s daily commercial considerations. Of course, the cost of implementing a compliance function will always depend on front-line processes but a flexible approach to business change can reap long-term commercial rewards.

Another compelling reason to understand the cost of compliance is the introduction of new reg tech solutions. While some businesses already use reg tech, there are increasing opportunities to leverage technology in the world of compliance. How can a Head of Compliance ensure that the implementation of a business’s reg tech solution makes commercial as well as risk management sense without understanding the cost of the current process?

Finally, does the business understand the cost of non-compliance? With the regulators increasing reliance upon third-party reviews for investigation and enforcement, the cost of dealing with regulatory concerns is significant. Not only can non-compliance pose a potential threat to new business activity but it can also bring a business to its knees.

If the Board and the business understand the cost of investigations and remediation then maybe investing in additional compliance, reg tech and business advisor support won't seem such a bad deal after all.

Deloitte’s experience in helping clients to implement cost-effective risk management, along with our reg tech and cost management expertise, can support you in turning your compliance function into a commercially aware function that has the information to help the business make compliant and commercial decisions through the life of the client relationship.

Are you Brexit ready?


Jo Huxtable, Partner, Tax

What lies ahead for many organisations is unclear but is likely to be complex, sector and firm-specific and open ended.

Impacts - both risks and opportunities will be particularly apparent for organisations with a UK and European footprint. In the Channel Islands, key issues will include:

  • The future of the customs union and the ability to trade freely both with the UK and the EU (in fisheries, agriculture and manufacturing).
  • The financial services sector in the Crown Dependencies, and the ability to secure regulatory equivalence where appropriate, especially around fund passporting.
  • The ability to continue to attract EU citizens to live and work in the Crown Dependencies while maintaining the Common Travel Area with the UK.

However, the effects of Brexit will ripple around the globe.

Uncertainties, risks and opportunities can be broadly categorised into three phases:

  • Near term - as the UK negotiates exit terms and future arrangements;
  • The longer term - as future arrangements are realised after the exit;
  • Continuing - as new relationships with countries outside of the EU develop.

All organisations should have a plan including the following steps:

  1. Activate a ‘Brexit taskforce’ by identifying the key personnel who will be involved in responding to Brexit developments.
  2. Identify specific areas that may be materially affected and require further investigation.
  3. Communicate to stakeholders. For example, shareholders will want to see a plan, customers will want guarantees, employees will want reassurance.
  4. Prepare and take action – ensure key opportunities are clear and identify where immediate risks need mitigation.
  5. Monitor the unfolding situation, plan for triggers and execute if appropriate.
  6. Work with experts who can provide additional input on specific areas including risk, economics, strategy and operations, tax, communications, HR, legal, regulatory and trade.

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