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ARGA

FRC welcomes the government’s response to its reform plans

The Financial Reporting Council (FRC) has welcomed the government’s response to its consultation ‘Restoring trust in audit and corporate governance’, which sets out the next steps to reform the UK’s audit and corporate governance framework. It believes that these reforms, which it states have been ‘long awaited’, offer ‘a once in a generation opportunity to ensure corporate Britain upholds the highest standards of governance and protects those stakeholders who rely on high-quality reporting’.

Legislation is required to ensure the new regulator – the Audit, Reporting and Governance Authority (ARGA) – has the powers it needs to hold to account those responsible for delivering improved standards of reporting and governance.

The FRC will shortly be outlining an extensive work plan to advance reforms which can be developed through existing powers or on a voluntary basis. The main areas for development include making the necessary changes to standards and guidance; strengthening auditing and accounting standards; and determining the behavioural changes that will be expected for the markets.

The FRC’s CEO, Sir Jon Thompson said: ‘It was pleasing to see during the consultation process overwhelming stakeholder support for the creation of ARGA with strengthened powers to ensure investors, employees, pensioners and suppliers are better protected against the consequences of corporate failure.’ However, Thompson expressed regret that the government decided not to introduce a version of the SarbanesOxley reporting regime, stating that this was a missed opportunity to improve internal controls.

The government’s response set out its intention to establish ARGA in order to implement high-quality regulation and high standards and encourage improvement by regulated entities and individuals. Other government plans include:

● Directors will be held accountable for significant failures in their corporate reporting and audit-related duties, auditors will be held to high standards, and professional bodies will be subject to better oversight by ARGA, as well as needing to take action on their own behalf.

● Large companies will report in a more comprehensible way on their resilience and on how far their reporting is independently assured, which will provide more helpful information for the benefit of investors, suppliers, customers, workers and pensioners.

● Large private companies’ corporate reporting and audit will be subject to the same scrutiny as that of listed companies.

RECRUITMENT

Serious skills shortage in accountancy

Research by recruiters Search has revealed that 38% of accountancy and finance firms are struggling to make senior hires. Managers say that the average lead time to find a suitable candidate for a permanent role is 3.8 months. The three most desirable skills listed by accountancy firms searching for recruits are adaptability, self-management and teamwork.

The need for specialised skills will create increased pay rates, as competition grows between organisations vying for talented recruits. Ed O’Connell, Managing Director of Accountancy and Finance at Search, predicts that financial and operational change specialists and specialist accountants will all see a sustained increase in demand as businesses look to evolve.

The Search Skill Shortage Report investigates the degree of the skills shortage in the UK and examines the causes and consequent impact this is having on business across a range of sectors (see bit.ly/3oz4kIg).

Legislation Day 2022

The initial draft clauses for the 2023 Finance Bill were published on 20 July 2022 and include more detail on previously announced proposals. The final contents of the Bill will be subject to confirmation at the next Budget ― which is likely to be this Autumn.

OECD Pillar Two: multinational top-up tax

As was expected, the government has published draft legislation to implement the OECD’s Model Rules for Pillar Two in the UK. International consensus on the two-pillar solution was reached in October 2021 and the government consulted from January to April 2022 on rules to implement the framework in the UK. The rules represent the UK’s adoption of the income inclusion rule (IIR), one of the two charging mechanisms in the global base erosion rules (globe rules)

The measure will introduce a new tax on UK parent entities within a multinational group, with the objective of ensuring that multinational enterprises operating within the UK pay a global minimum level of tax. A top-up tax will be charged on UK parent entities with nonUK subsidiaries, where the group’s profits arising in the subsidiaries’ jurisdiction are taxed at below the minimum rate of 15%. This will require the group to calculate its effective tax rate in each jurisdiction in order to determine whether the top-up tax will apply.

A group will be within the scope of the rules when it has members in different countries and has global revenues above €750 million in at least two of the past four accounting periods. There are exclusions for entities that are typically exempt from corporation tax, such as pension funds and international organisations, as well as for investment funds and real estate investment vehicles.

The measure will have effect for multinational enterprises with fiscal years beginning on or after 31 December 2023. At the time of the consultation, the government had intended to bring in the rules from 1 April 2023, but in June 2022 it was announced that, in response to reactions to the consultation, the government would delay implementation to December 2023.

The consultation response includes some government comments on aspects of the two-pillar rules that are not covered by the draft legislation, including a note that there are strong arguments in favour of a UK domestic minimum tax – the government intends to continue to consider this although does not give a timetable. There is also an acknowledgement that there is still a significant amount of work to be carried out on the two-pillar rules at OECD level.

Research and development tax relief reform

The government has published draft legislation providing for a number of changes to the research and development (R&D) tax reliefs for companies which will apply for accounting periods beginning on or after 1 April 2023.

The changes apply to both the R&D expenditure credit (RDEC) and the scheme for small and medium enterprises (SMEs). Reforms to the reliefs were initially announced at Spring Budget 2021, when a consultation with stakeholders was carried out. Further details were then published at Autumn Budget 2021 and Spring Statement 2022.

Two new categories of expenditure qualifying for relief will be introduced. These are the costs of data licences and cloud computing services. A data licence is defined as one to access and use a collection of data services. Cloud computing services include providing access to, and maintenance of, remote data storage, operating systems, software platforms and hardware facilities. Amendments are also to be made to the patent box legislation, which applies the R&D definitions of qualifying expenditure in its calculations, to include data and cloud computing costs.

Relief for subcontracted work and externally provided workers will be limited to focus on UK activity. Expenditure must either be ‘UK expenditure’ on R&D in the UK or ‘qualifying overseas expenditure’ undertaken outside the UK because the necessary conditions are not present in the UK due to geographical, environmental or social factors. Cost of the work and availability of workers are specifically excluded as factors.

All claims to R&D reliefs will have to be made digitally. Claims will have to include a breakdown of costs across the qualifying categories and provide a description of the R&D. A claim will have to be endorsed by a named senior company officer and will have to include details of any agent advising on the claim. Additionally, companies will be required to inform HMRC in advance that they intend to make a claim within six months of the end of the accounting period to which it relates by making an online ‘claim notification’. There will be an exception to the latter requirement for companies which have claimed in any of the three preceding accounting periods. Secondary legislation will detail the information to be included with a claim or a claim notification.

Amendments to qualifying asset holding companies regime

The government is introducing amendments to the qualifying asset holding companies (QAHCs) regime which was introduced on 1 April 2022. The amendments are designed to enable a greater number of diversely held fund structures to be eligible for the QAHCs regime in a manner which is better aligned with the original scope of the regime.

The changes include enabling a collective investment scheme which is a ‘parallel fund’ of a collective investment scheme which satisfies the genuine diversity of ownership condition to be treated as meeting the diversity of ownership condition for the purposes of the QAHCs regime. Broadly, a ‘parallel fund’ is one which is closely associated with another collective investment scheme and must satisfy conditions requiring investments in substantially the same assets, holding investments using the same companies on substantially the same terms and in the same ratios, and the management of the collective investment schemes to be substantially coordinated.

The changes will also enable ‘aggregator funds’ to be treated as meeting the diversity of ownership condition for the purposes of the QAHCs regime. Broadly, an ‘aggregator fund’ is one in which each person and fund with an interest in the ‘aggregator fund’ meets the genuine diversity of ownership condition and where the management of the ‘aggregator fund’ and each of the funds with an interest in it is substantially coordinated.

Transfer pricing

From April 2023, new transfer pricing documentation requirements for UK businesses are proposed. The clauses to be included in Draft Finance Bill 2023 were published as part of Legislation Day 2022, and aim to standardise the transfer pricing documentation used in the UK in accordance with the G20/ OECD Base Erosion and Profit Shifting (BEPS) Action Plan, specifically the Action 13 Final Report.

Whilst the country-by-country reporting (CbCR) minimum standard has already been introduced in the UK, a standardised master file and local file has not. This has meant UK businesses have taken different approaches to their reporting, and this inconsistency has created a degree of uncertainty about the appropriate transfer pricing documentation that needs to be kept. A standardised format of master file and local file as well as a summary audit trail questionnaire document must, for accounting periods beginning on or after 1 April 2023, be kept and preserved by multinational enterprises (MNEs) within the CbCR regime. This proposal has previously been consulted on, with the response covered in the Tax Administration and Maintenance Day 2021 summary.

The draft clauses insert a power to make regulations. These regulations (yet to be published in draft form) will specify the form and manner in which relevant transfer pricing records are kept and preserved, and they can refer to the OECD guidelines. Provisions for penalties for inaccurate record keeping are also included, as are new information powers for HMRC relating to these new transfer pricing records.

Double taxation relief claims: no extended time limit claims in certain circumstances

The government is introducing new provisions for insertion in Finance Bill 2023, which are relevant to the taxation of foreign dividends before the UK’s introduction of the distribution exemption in 2009. Subject to exceptions, the new rules aim to ensure that no extended time limit claim for double tax relief under TIOPA 2010, s 79 or ICTA 1988, s 806(2) may be made on or after 20 July 2022 for a credit calculated by reference to a foreign nominal rate of tax.

Exceptions to this new rule apply where the relevant accounting period to which the extended time limit claim applies is under enquiry (or in respect of which the enquiry window is still open), and where a tax assessment in relation to the relevant accounting period is subject to an appeal.

TRIBUNAL

KPMG fined £14.4million following investigation

The FRC has announced sanctions against KPMG, a former KPMG partner and four former KPMG employees, following the findings of an independent disciplinary tribunal. As well as being fined £14.4 million, KPMG has been severely reprimanded and will pay £3.95 million in costs. The KPMG partner who led the audit of Carillion has been fined £250,000.

The allegations stated that KPMG had provided the FRC with ‘false and misleading information and documents’. These were provided when FRC audit quality reviews (AQR) were undertaken of KPMG’s audits of Carillion and Regenersis. KPMG staff were found to have created a ‘false or misleading’ audit papers and meeting minutes which it presented to the AQRs.

KPMG has been ordered to appoint an independent reviewer to conduct a review to consider the effectiveness of its current AQR policies and procedures in supporting high quality engagement with the AQR inspectors.

In its findings, the tribunal stated: ‘The seriousness of the misconduct that we have found proved scarcely needs explanation. Effective audits are essential to the financial system. Management and investors should be able to rely on the audited financial reports of the company in question. The purpose of AQRs is to assess and suggest improvements to the effectiveness of audits. The effectiveness of the regulation of auditors and audits depends on the accurate disclosure to the AQR Team of the work carried out by the auditor. Misleading the AQR undermines the effectiveness of its work.’

KPMG admitted that it had misled regulators at the start of the FRC tribunal.