This is the final group of amendments relating to schedule 46. Its substance stems from the debate on materiality that we had in the Committee of the whole House. It seems that the Government have moved beyond the position that they enunciated then. The issue is important because where one strikes the line on what is material in a tax computation or a tax return determines the exposure to penalties of the senior accounting officer. What was seen to be missing from the legislation as drafted was any concept of materiality. We pushed the Financial Secretary on the matter in the debate in the Committee of the whole House. I thought, at that point, that the Financial Secretary was loath to move. When I raised the point of materiality, he said that
companies already have an obligation to deliver correct and complete returns. The measure ensures that the minority of senior accounting officers who do not oversee systems that generate correct and complete computations take responsibility for addressing that. That is the level of the bar that we envisage applying.[Official Report, 13 May 2009; Vol. 492, c. 886.]
I had no doubt that that meant 100 per cent. accuracy. I pushed the Minister again and he came up with the same example that the Exchequer Secretary used earlier about this apparently large company that had systemic errors, which we have only just got to the bottom of.
So, there is an important issue of principle here. What we must bear in mind is the obligation to keep proper accounting records that directors are already subject to under the Companies Act 2006. Section 386 of the 2006 Act imposes a duty to keep adequate accounting records
to disclose with reasonable accuracy, at any time, the financial position of the company at that time.
That obviously includes the tax liabilities to which the company has been subject. There are penalties that relate to a failure to comply with that duty. So, a mechanism is already in place to ensure compliance.
The Bill, as drafted in paragraph 16 of the schedule refers to appropriate tax accounting arrangements. Amendment 268 seeks to provide a definition of tax accounting arrangements through secondary legislation, so that the senior accounting officer will know exactly what are appropriate tax accounting arrangements.
One option would be to omit the current vague definition and divert to regulation, which would give time for proper consultation; instead, it has been rammed into the Finance Bill, with the Department hoping that everything works out for the best. Including a regulation-making power would give the Treasury time to think carefully and consult business properly; it would allow due process. Alternative methods are suggested in amendment 226, which would inset the word reasonably in paragraph 16(2)that would go some way to introducing the concept of materialityand amendment 227, which would add a new sub-paragraph.
The Government have listened to the argument and understood the strength of the representations made by the Committee of the whole House and others about materiality. The draft guidance now starts to approach that question, which I welcome. A commonly accepted definition of materiality relates to what is in the accounting standards. However, the final sentence of paragraph 61 of the draft guidance says of the standards that
They should not be interpreted as imposing any higher standards than are already required when preparing returns but neither does the phrase in all material respects import the concept of accountancy or audit materiality into the legislation.
Given that tax return completions have to be signed off as being accurate, why have another test on the certificate to say that the systems are accurate? It would lead to needless duplicationunless one is introducing a new definition of materiality.
The senior accounting officer might breathe a sigh of relief on hearing that material respects had been introduced, but paragraph 62 of the guidance does not give anything more concrete. It states:
The reference to material respects along with the use of the words appropriate and reasonable within the legislation does however make it clear that the focus is on the significance of the transaction, system or tax and the relative size of these items in terms of the business.
No guidance has been given on relative size. The guidance goes on to say that
HMRC are not interested in small or insignificant errors and this fits with our policy of focusing on significant risks.
Again, no guidance is given on what is meant by small or insignificant.
The question is what further clarity the Government are seeking to give through this change. They have disregarded the conventional accounting and auditing definition of materiality, and they have introduced some clarification in paragraph 62 of the draft guidance; but it seems that materiality rests somewhere between the accounting and auditing definitions. It should be a little more significant than the language now used to sign off tax returns and computations.
I return to the example given by the Financial Secretary. I raised the issue of systemic calculations, wondering whether it would be a problem if each computation or transaction was a penny out. The guidance now reflects that, so I can see that there has been at least some outcome from my raising the issue. However, there is the question of what happens with systemic errors, and how big they must be to be noted and disclosed to Inland Revenue.
This is a major U-turn by the Treasury, which has now accepted that maturity has a role to play in the sign-off by the senior accounting officer. It has been a bit more specific than the current guidance about what that actually means in practice for businesses.
Government amendment 295 relates to an issue that has been raised by several bodies that are concerned about the kind of taxes that might be brought within the scope of the measure. No taxes were excluded from the original clause, so the fact that the Government have been specific about which taxes should be the focus of the accounting certificate is welcome. To be fair to the Government, on page 5 of the guidance they have also excluded certain taxes, duties and liabilities explicitly, including things such as the child trust fund, life assurance premium relief, the unclaimed asset scheme and the European savings directive, and any requirements that come from them.
I welcome the greater clarity that amendment 295 gives, but I think that the Government need to go a little further in providing some clarity on amendment 294 so that there is a much clearer understanding in the minds of senior accounting officers as to what material respects actually means.