Tax is entering the technological age. IT systems are under HM Revenue & Customs scrutiny. Technology can help manage tax risk and will be integral to tax mpliance in the near future. Although increased attention from the tax authorities is likely to lead to an additional mpliance burden for business, taking the opportunity to standardise and simplify business processes and ntrols now will undoubtedly unlock value going forward.

Tax can sometimes be a ‘black box’ for anisations and its system requirements have not always sat mfortably with the IT driven process revolution the rest of finance has been experiencing since Sarbanes-Oxley. These rules forced many large rporates to look critically at every aspect of their financial reporting IT systems and ntrols, with the directors required to attest to their adequacy.

AdvertisementOften tax was an isolated function with its own technical systems and tools and these were not necessarily included in wider systems reviews and projects.

Tax authorities getting up to speed

This scenario is changing. Following HMRC’s review of its links with large business late in 2006, it announced a new approach to mpliance risk management for the largest businesses, taking a risk-based, real-time approach to determine a taxpayer’s level of mpliance.

Large businesses (roughly those with turnover of over ￡200m) have already been subject to a risk assessment by HMRC across all taxes. Those businesses determined as ‘low risk’ are subject to less stringent examination, whereas those deemed to be ‘non-low risk’ may now undergo more significant enquiry in order for HMRC to gain adequate mfort.

Sring is based on various criteria, including an assessment of the taxpayer’s ability to deliver the right tax at the right time through its systems, processes, ntrols and ernance framework. Clearly, the adequacy of the IT systems is now under the spotlight with HMRC now appreciating the importance of transaction processing systems.

This marks a shift in approach, especially around direct rporate taxes. The focus is no longer only on a taxpayer’s returns. HMRC is now ncerned with also determining the fitness of the taxpayer’s processes and arrangements leading to the preparation of the return. HMRC now cares about the process and systems, as well as the end result.

Senior Acunting Officer Signoff

Building on this, the recent Budget and subsequent developments brought the introduction of the requirement for the largest taxpayers to appoint a senior acunting officer to sign off, with personal acuntability, on the appropriateness of the tax acunting arrangements in place. The legislation determining the criteria for a mpany to be caught is still being finalised – but it is widely expected to be mpanies with a turnover exceeding ￡200m.

These are mostly mpanies with a ‘large business relationship’ with HMRC where a client relationship manager has been appointed. The SAO is the person with ‘overall responsibility’ for the group’s acunting arrangements. – typically the CFO.

The legislation places the onus on the SAO to assess and attest to the tax acunting arrangements, certifying either that they are appropriate (or that reasonable steps have been taken to make them appropriate), or explain the ways in which they are not appropriate. Failure to appoint an SAO, omission to provide a certification or the provision of an inaurate certification will lead to a penalty (￡5,000 for each infringement) being levied on the SAO personally, or the mpany where an SAO is not appointed.

Although HMRC advised that it will not specifically audit the SAO’s certification, it is anticipated that should stage 3 audit testing (see box) lead to systems weaknesses being identified which were not disclosed in the certification, a penalty is likely to be levied on the SAO personally.

Assessing your IT ntrols

Tax processes, general IT ntrols and specific application ntrols should be critically reviewed and assessed. The tax director needs to work with IT to address these questions:

There is a clear trend towards risk-based, process driven, real-time tax reporting and enquiry across all the taxes. The capability, flexibility and speed of aess to a taxpayer’s information systems are increasingly important. There is an assumption on the part of the authorities that mpanies are set up to pe.

Now is the time to take stock to see how your systems measure up and o maximise opportunities for efficiencies and improvements.

XBRL

Technology is to the fore again on tax reporting. HMRC recently formally ma ndated the online filing of all rporation tax returns (including supporting schles and mpany acunts) in eXtensible Business Reporting Language (‘XBRL’) format from 1 April 2011.

How are mpanies preparing?

XBRL is a web-based mputer language written specifically for business reporting. HMRC are driving this forward because they want to have aess to information that they can interrogate more efficiently. The resulting statistics and variances will enable HMRC, for example, to be more specific in the questions raised during an enquiry.

Many mpanies are unaware of this development. Fortunately, most tax software vendors are already working hard to ensure that tax numbers can be filed in an XBRL format. However, it is the mpany acunts requirement that may be the stumbling block. panies need time to nsider their financial statements to assess what work is required to meet the UK GAAP and/or IFRS XBRL requirements, including implementing and testing.

Process driven

HMRC has indicated it will focus on understanding a taxpayer’s processes and systems, undertaking more detailed audits in areas where weaknesses are identified. This will be carried out in a three stage review:

Stage 1: to understand the wider ernance framework within which tax is managed;

Stage 2: to evaluate the systems, processes and skills being deployed;

Stage 3: to perform audit testing to establish and quantify weaknesses in information systems, their impact on the tax numbers as well as remmendations of remedial actions. This stage is unlikely to be performed on low risk businesses.