International Accountant 120 by Association of International Accountants

INTERNATIONAL

ACCOUNTANT NOVEMBER/DECEMBER 2021 ISSUE 120

Can environmental taxes save the polar bears? A summary of Autumn Budget 2021 How business structures can benefit from a good old fashioned clear out FRS 102 and FRS 105: choosing the right path

CONTENTS

In this issue Contributors 2

Meet the team

News and views

AIA news

HMRC warns customers about Self Assessment tricksters AIA professional qualification assessed by UK ENIC

Students 8

Accounting standards

Budget 10 Autumn Budget 2021 summary The chancellor of the exchequer, Rishi Sunak, delivered the Autumn Budget on Wednesday 27 October 2021. Headline grabbing announcements included an increase in the national living wage, the cancellation of the expected rise in fuel duty and a cut to the universal credit taper rate.

Environmental taxes

Clear out your garage Many corporates (not just large multinationals) seem to excel in making things unnecessarily complex by setting up more legal entities than they know what to do with. Eddie Bines (Kroll) explains how business structures can benefit from a good old fashioned clear out.

Can tax save the polar bears? There are different concepts that we can use as a basis for a tax system that makes significant strides towards net zero. Christy Wilson (Katten Muchin Rosenman UK LLP) asks whether the lack of cohesion in our environmental taxes will make it even harder to save our ecosystems.

Charities 22 The risks of financial crime Charities can face financial crime risks due to the nature of their activity, especially when operating internationally or in areas of economic and social upheaval. David Potts (AIA) examines how these risks must be assessed and controlled in order to avoid providing a vehicle for illicit funds or criminal activity.

Editor Rachel Rutherford E: editor@aiaworldwide.com T: +44 (0)191 493 0281

International Accountant Staithes 3, The Watermark, Metro Riverside, Newcastle Upon Tyne NE11 9SN United Kingdom

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AIAWORLDWIDE.COM | ISSUE 120

Corporate simplification

Editorial Information International Accountant, the bimonthly publication of the Association of International Accountants (AIA).

+44 (0)191 493 0277 www.aiaworldwide.com

Choosing the right path Steve Collings (Leavitt Walmsley Associates) examines the two main accounting standards – FRS 102 and FRS 105. Both standards are applied widely throughout the UK and Republic of Ireland and questions often arise as to the suitability of each standard depending on whether the client is a micro-entity or small entity.

AIA Achieve: your best chance of exam success Achieve Academy is the AIA’s fully integrated online learning platform, which provides students with a structured programme of study for all papers within the AIA professional qualification and the Certificate in Business Finance for Professionals.

Subscribe to International Accountant subscriptions@aiaworldwide.com

Cryptocurrency 26 The new ‘digital gold’? William Je (CEO, Hamilton Investment Management Ltd) examines the role that digital currencies are likely to play in the future of international finance. Financial institutions and investors alike have been divided on the topic of whether cryptocurrencies should be considered as an asset class.

Dates for your diary Upcoming events

Technical 29 Global updates

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Editor’s welcome

Contributors to this issue

Editor’s welcome

EDDIE BINES

Eddie Bines is a managing director in the Restructuring Advisory practice at Kroll and has more than 23 years of corporate restructuring and advisory experience. He specialises in working alongside clients to deliver large scale global and UK-centric corporate structure simplification initiatives. WILLIAM JE

vital part of AIA’s work as a professional accountancy body is representing its members and the wider profession on key issues. To support our efforts in this area, AIA has recently joined the All Party Parliamentary Group (APPG) on Taxation and the Green Finance Education Charter. The APPG on Taxation engages with government and Parliament to look at and understand tax policy and taxation on all levels, including administration, simplification and digitalisation, EU Brexit and its impact on the UK’s taxation system, and international taxation in the new post‑Brexit and COVID-19 economy. Signatories of the Green Finance Education Charter work with government, the Green Finance Institute, and a number leading financial professional bodies to embed green finance and sustainability into the core curricula, new qualifications, and the continued professional development of accountants. Each of the signatories acknowledge the collective responsibility of the global community, including the banking, finance and professional

Rachel Rutherford Editor, IA

services sectors, to deliver Article 2.1c of the Paris Agreement and the UN Sustainable Development Goals. In this issue, we look at environmental taxes and the different concepts that we can use as a basis for a tax system that makes significant strides towards net zero. We also consider whether the lack of cohesion in environmental taxes will make it even harder to save our ecosystems (see page 19). We consider the role that digital currencies are likely to play in the future of international finance, and ask whether cryptocurrencies should be considered as an asset class (see page 26). We review the importance of good business structures, and how corporates can make things unnecessarily complex by setting up overly complicated legal entities (see page 24). And we examine FRS 102 and FRS 105 to understand how small businesses should decide which to apply (see page 16). There is also a full summary of the UK Budget (see page 10). For AIA students studying the professional qualification or Certificate in Business Finance for Professionals, we look at what is included in the new AIA learning management platform, AIA Achieve Academy, and why it is your best chance of exam success (see page 8).

William Je is the Founder and Chief Executive Officer of Hamilton Investment Management Limited, a global fund manager with multi-billion assets under management. His portfolio includes private equity investments in licensed banks, fintech and social media projects. STEVE COLLINGS

Steve Collings, FMAAT FCCA is the audit and technical partner at Leavitt Walmsley Associates Ltd, where Steve trained and qualified. In 2010, Steve became a Fellow of the ACCA. CHRISTY WILSON

Christy Wilson is an Tax Associate in the Transactional Tax Planning practice at Katten Muchin Rosenman UK LLP. She completed her training contract at Dentons in September 2020 and has been involved in pro-bono projects for the National Centre for Domestic Violence. DAVID POTTS

David Potts is director of operations at the AIA, and is responsible for maintaining AIA’s international recognition and implementing the professional body’s regulatory strategies and annual review cycle. ISSUE 120 | AIAWORLDWIDE.COM

News SELF ASSESSMENT

SUSTAINABILITY

HMRC warns customers about Self Assessment tricksters

HMRC warns customers completing their 2020/21 tax return to be on their guard as almost 800,000 tax-related scams were reported in the last 12 months. Fraudsters use Self Assessment to try and steal money or personal information from unsuspecting individuals. In the last year alone, HMRC has received nearly 360,000 bogus tax rebate referrals. The Self Assessment deadline is 31 January 2022 and customers may expect to hear from HMRC at this time of year. More than 4 million emails and SMS will be issued this week to Self Assessment customers pointing them to guidance and support, prompting them to think about how they intend to pay their tax bill, and to seek support if they are unable to pay in full by 31 January. However, the department is also warning customers to not be taken in by malicious emails, phone calls or texts, thinking that these are

genuine HMRC communications referring to their Self Assessment tax return. Criminals use emails, phone calls and text messages to try and dupe individuals, and often mimic government messages to make them appear authentic. They want to trick their victims into handing over money or personal or financial information.

SMES

IFAC publication highlights opportunities in sustainability information for small businesses and their advisers IFAC has released a publication, “Sustainability Information for Small Businesses: The Opportunity for Practitioners,” exploring the diverse benefits of embracing sustainability information. The report examines the importance of readily available, relevant and reliable sustainability information for achieving better-informed decisions, enhanced strategic and risk management, and more thorough and valuable reporting to external stakeholders. It also highlights a range of emerging services that practitioners can provide to their clients, including advisory services, reporting, agreed-upon procedures engagements, and assurance services. Small businesses make up more than 90% of businesses worldwide; they are AIAWORLDWIDE.COM | ISSUE 120

UK welcomes work to develop global sustainability reporting standards

critical to achieving sustainable outcomes for economies, the environment and society. They can find significant advantages from establishing (or enhancing) processes, systems and controls for identifying, measuring and analysing sustainability information. This can include improved efficiencies and performance, as well as differentiation from competitors. Small businesses are also likely to be subject to sustainabilityrelated reporting information requests from a diverse range of stakeholders, including large companies, banks, and suppliers – if they are not already. The publication is available at: www.ifac.org

The UK government joins 40 international partners from six continents to welcome the establishment of the IFRS Foundation’s new International Sustainability Standards Board at COP26. The IFRS Foundation has announced the establishment of an International Sustainability Standards Board to develop comprehensive global baseline sustainability reporting standards under robust governance and public oversight. The IFRS Foundation confirmed consolidation of two sustainability reporting organisations, the Value Reporting Foundation and the Climate Disclosure Standards Board, to create a global standard-setter for sustainability disclosures for the capital markets. The Foundation also published two prototype standards to enable the International Sustainability Standards Board to rapidly build on existing frameworks, including the Task Force on Climate-Related Financial Disclosures, when developing its standards. Standards will be subject to full public consultation and can be considered for adoption by jurisdictions on a voluntary basis. Jurisdictions will have their own legal frameworks for adopting, applying or otherwise making use of international standards. Finance Ministers and Central Bank Governors from 40 jurisdictions across six continents joined the UK in publicly welcoming the announcement of the establishment of the International Sustainability Standards Board and its work programme to develop a set of internationally consistent, high quality and reliable baseline standards for disclosure of sustainability-related information on enterprise value creation.

News HONG KONG

Hong Kong FRC and ICAC joint operation against suspected misconduct and bribery A joint operation “Sniper” of the Financial Reporting Council (FRC) and the Independent Commission Against Corruption (ICAC) was conducted under the arrangement of the Memorandum of Understanding signed between the FRC and the ICAC. The joint operation involved a search of the offices of a public interest entity auditor in the initial public offering of a listed company and the premises of other relevant parties. The FRC conducted the search for the suspected misconduct of the relevant public interest entity auditor and registered responsible persons under the Financial Reporting Council Ordinance. The ICAC conducted the search and made some arrests for suspected corruption offences under the Prevention of Bribery Ordinance. The joint operation signifies the FRC’s determination to combat misconduct in Hong Kong’s financial markets through collaboration with other regulatory bodies and enforcement agencies. The FRC will unhesitatingly use all the enforcement tools available to it when necessary to protect the interests of the investing public and maintain Hong Kong’s reputation as an international financial centre.

ACCOUNTING STANDARDS

UK Endorsement Board and Accounting Standards Board of Canada commit to ongoing collaboration IASB’s Third Agenda Consultation. The UKEB also updated the AcSB on its activities relating to its assessment of IFRS 17 Insurance Contracts for adoption for use in the UK. UKEB Chair, Pauline Wallace said: “I am delighted that we have had the opportunity to Pauline Wallace Linda Mezon-Hutter exchange views with the members of the The UK Endorsement Board (UKEB) Accounting Standards Board of Canada and the Accounting Standards Board on IASB projects, thus enhancing our (AcSB) of Canada held a virtual understanding of the perspectives of meeting on 17 November 2021 in other standard setters. The UKEB looks which both bodies committed to forward to more opportunities to discuss ongoing collaboration on international international accounting and reporting accounting issues. This was the first developments with the AcSB in future.” bilateral meeting between the UKEB AcSB, Linda Mezon-Hutter said: and the AcSB following the formation “Our commitment to collaborating with of the UKEB in March 2021. organisations around the world to further The meeting afforded both Boards the objective of harmonising accounting an opportunity to introduce themselves standards internationally continues, and exchange views on International even in this current virtual environment. Accounting Standards Board (IASB) In particular, sharing perspectives on projects in which they have a common international projects provides valuable interest. Projects discussed included insight into issues that are important to Rate-regulated Activities and the stakeholders in different jurisdictions.”

AUDIT

CEAOB guidelines on the auditors’ involvement on financial statements in ESEF The Committee of European Auditing Oversight Bodies (CEAOB) has issued revised “CEAOB guidelines on the auditors’ involvement on financial statements in European Single Electronic Format (ESEF)”. They replace the initial guidelines issued by the CEAOB in 2019. The European Single Electronic Format (ESEF) is the new electronic reporting format for annual financial reports published by issuers whose securities are admitted to trading on a

regulated market in the European Union for financial years beginning on or after 1 January 2021. European Commission Interpretative Communication 2020/C379/01 states that EU law requires auditors to provide an opinion on whether the financial statements included in annual financial reports comply with the requirements in the ESEF Delegated Regulation (EU) 2019/815. The objective of the Guidelines is to describe the CEAOB’s expectations

regarding: ● the procedures to be performed by auditors to assess compliance with the ESEF requirements; ● the consequences of any misstatements identified by auditors; and ● the form and content of the audit report regarding whether the financial statements comply with the ESEF requirements. The Guidelines highlight specifications to be complied with by auditors in addition to the provisions of auditing standards and are available at: https://ec.europa.eu. ISSUE 120 | AIAWORLDWIDE.COM

News News

AIA

NEWS QUALIFICATION

SUSTAINABILITY

AIA’s commitment to sustainability Green Finance Education Charter

The government, the Green Finance Institute, and a number of leading financial professional bodies, including AIA, are signatories of the green finance education charter, designed to embed green finance and sustainability into the core curricula, new qualifications and the CPD of accountants. The signatories acknowledge the collective responsibility of the global community, including the banking, finance and professional services sectors, to deliver Article 2.1c of the Paris Agreement and the UN Sustainable Development Goals.

The Commonwealth

As a Commonwealth accredited organisation, AIA adheres to the values and principles embedded in Commonwealth Declarations, notably the Singapore Declaration on Commonwealth Principles (1971) and the Harare Commonwealth Declaration (1991), which outline a commitment to promoting democracy and good governance, human rights and the rule of law, gender equality and sustainable economic and social development. The Commonwealth helps member countries to protect their environments and operates a number of environmental programmes. Access online resources on green finance and sustainability at: www.aiaworldwide.com/ sustainability AIAWORLDWIDE.COM | ISSUE 120

AIA professional qualification assessed by UK ENIC The new AIA professional qualification has been independently assessed by the UK National Information Centre (UK ENIC, formerly NARIC) for global qualifications and skills, to ensure it remains at the appropriately high specification. AIA commissioned the independent evaluation and benchmarking of the updated AIA professional qualification for first assessment in November 2021, in relation to the Regulated Qualifications Framework (RQF). The overall aim was to facilitate wider understanding of the comparable educational levels of all three levels of the programme and the AIA International Accountant designation. The report found the following comparability in the context of the UK education system: AIA qualification/ Comparable designation RQF level Certificate in Accountancy 5 (Foundation) Diploma in Accountancy 6 (Professional Level 1) Advanced Diploma in 7 Accountancy (Professional Level 2) International Accountant 7 Recognised Professional 7 Qualification (Qualification as a Statutory Auditor in the United Kingdom) The assessment of the qualification used a well-established methodology for benchmarking qualifications to examine each qualification’s entry requirements, duration, structure, content, learning outcomes, modes of learning, assessment and associated outcomes. It concluded that the range of skills and knowledge developed and assessed at Foundation level (which leads to the award of the Certificate) was found to relate closely to a

range of knowledge and skill expectations at RQF Level 5. The focus at this level is establishing a secure theoretical and practical knowledge and understanding of the principles of accounting, whilst also developing an awareness of major schools of management thought. In the Professional Level 1 (Diploma) course, there is an increased focus on developing advanced conceptual knowledge and understanding of financial management and accounting and critical analysis skills, evident in both the learning outcomes and the assessment. Reflecting expectations at RQF Level 6, learning outcomes and assessment tasks place emphasis on solving complex problems with numerous interacting factors. The outcomes and assessed skills in the Professional Level 2 papers leading to the Advanced Diploma were found to compare well to RQF Level 7. In particular, there is a focus on specialised skills and knowledge, integrating current developments in the field of accountancy, business management and financial management. The case study based assessment evaluates the ability to apply complex specialised skills and knowledge from across the course of study to solve complex, multifaceted problems. The International Accountant and the Statutory Auditor designations require completion of all levels of professional training to obtain, including Professional Level 2. They are also found to be comparable to RQF Level 7. AIA also maintains its recognition as a Recognised Qualifying Body (RQB) for statutory auditors in the UK, as a Prescribed Body under the Companies (Auditing and Accounting) Act 2014 in the Republic of Ireland, as a supervisory body under the UK and ROI Money Laundering Regulations.

News

AIA calls for enhancements to the UK’S AML regulatory and supervisory regimes

The AIA has responded to two consultations issued by HM Treasury on “Amendments to the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 Statutory Instrument 2022” and “Call for Evidence: Review of the UK’s AML/ CFT regulatory and supervisory regime”. As a professional body supervisor recognised under Schedule 1 of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (as amended 2019), AIA recognises its key role in preventing economic crime and contributing to a robust approach to AML safeguards. Working with other accountancy sector supervisory bodies through the Accountancy AML Supervisors’ Group (AASG) and more widely with government, regulators and other sectors through the AML Supervisors Forum (AMLSF) enables a real publicprivate partnership which delivers a focused response to the threat of money laundering and terrorist financing. AIA Director of Operations David Potts said: “We recognise that the regulations are in place to protect our members and safeguard against their being exploited by criminal elements to facilitate illicit activity. Therefore, we work to provide guidance and support, so they recognise the red flags of money laundering and fulfil their obligations by reporting suspicious activity. “However, there is currently little transparency surrounding the oversight arrangements for the statutory supervisors, particularly on effectiveness, and the sector would benefit from greater consistency and clarity on how the effectiveness of supervision is measured and assessed.” Members can access a range of anti-money laundering resources via the AIA website, including the full consultation responses.

FRAUD CHARTER

AIA signs up to new accountancy fraud charter AIA is a signatory to the Joint Fraud Taskforce Accountancy Charter, which is a voluntary agreement between law enforcement, professional supervisory bodies and the government to combat fraud. Developed in conjunction with the Home Office, the charter has four main actions to be delivered in collaboration between the accountancy profession, the government and law enforcement agencies.

1. Improved information regarding fraud

The first action in the charter commits to evolve the data sharing capability for the accountancy profession to develop a greater understanding of the threat level that exists within the industry.

2. The fraud awareness toolkit

The development of a fraud awareness toolkit is a central aim of the charter and will include advice and guidance to accountants on current fraud risks, checks they can undertake to help identify potential frauds, and where to signpost victims to for support.

3. Enhancing Companies House data To reduce the level of fraudulent information hosted on Companies House, and in line with ongoing reforms, the Home Office will work with BEIS,

MONEY LAUNDERING

Companies House and the accountancy sector to improve the reliability of Companies House data.

4. Increase fraud awareness and change customer behaviour

The fourth action is an ongoing fraud awareness campaign which will be led by the National Economic Crime Centre and supported by the accountancy profession with the intention of changing customer behaviour to reduce fraud. David Potts, AIA Director of Operations said: “Today’s criminals are using increasingly sophisticated methods of deception, making fraud harder to detect and having a devastating effect on victims. “The role that an accountant plays in fraud prevention can be vital and we are pleased to be working alongside government, law enforcement agencies and other professional bodies in the sector to do all we can to educate and protect against fraud.”

TAX POLICY

AIA joins All Party Parliamentary Group (APPG) on Taxation AIA has joined the All Party Parliamentary Group on Taxation. Formed in 2006, the group engages with government and Parliament to look at and understand tax policy and taxation on all levels including administration, simplification and digitalisation, EU Brexit and its impact on the UK’s taxation system, and international taxation in the new post-Brexit and Covid-19 economy. The group has produced a series of papers and reports on tax administration

and hosted several private and public events on a wide range of taxation policy issues. It has strong links with a broad range of parliamentarians, organisations and individuals across the tax spectrum in the UK and internationally. Working in partnership with the new government, the Group aims to create a “safe space” for parliamentarians and interested stakeholders to meet, examine best practice, discuss and develop innovative proposals to reform, simplify and make the UK’s taxation system fairer. Rachel Rutherford, AIA Director of Policy and Public Affairs, said: “The AIA is looking forward to working with the APPG on Taxation on future events and research and representing our members within this sphere.” ISSUE 120 | AIAWORLDWIDE.COM

AIA ACHIEVE

Your best chance of exam success This article examines how AIA Achieve can help you to make the most of your study time.

What is AIA Achieve?

chieve Academy is the AIA’s fully integrated online learning platform, which provides students with a structured programme of study for all papers within the AIA professional qualification and the Certificate in Business Finance for Professionals. Created by experts, it includes a range of learning tools specifically designed to give students the best chance of exam success and comprises a blend of on-demand learning and live workshops.

What’s included?

The AIA Achieve programme includes: ● AIA Learning and Practice Workbooks for each paper within the syllabus. These books offer targeted learning, at the appropriate level, which focus on the exam; ● AIA approved study text with full syllabus coverage from BPP Learning Media; ● online learning resources, including recorded lectures and bite-size videos, structured in line with the qualification to give you optimum results; ● practice questions: check-point tests provide practice questions for every subject to ensure progression and depth of learning; ● tutor support and feedback from subject experts;

AIA Achieve is designed to give students the best chance of exam success and comprises a blend of on-demand learning and live workshops.

ISSUE 120 | AIAWORLDWIDE.COM

AIA ACHIEVE

● graded check point tests taken within the AIA platform; ● live topic workshops held by accountancy experts; ● mock exams with performance feedback; and ● proactive student support from AIA throughout the course.

Who is it for?

AIA Achieve was designed for students undertaking the AIA professional qualification or Certificate in Business Finance for Professionals. It gives students the flexibility to study when and where they want, with tailored online resources within a structured format to keep students motivated, show progression and develop understanding of the subject. Available worldwide, AIA Achieve delivers a high level of guidance and support, whilst allowing students to study in their own time with tests and checkpoint tests to ensure they are meeting the required level of understanding.

Student support

The course was designed in conjunction with BPP Learning Media, and utilises a range of teaching and learning tools that align teaching to the qualification and assessments. Students benefit from the guidance and experience of subject experts and have access to extensive, relevant support with exam relevant workbooks, questions, lectures and study guidance. All study materials are available online and students have the flexibility to organise their study to suit their personal circumstances and progress towards becoming a qualified accountant. In addition, the dedicated team at the AIA are here to support all students through their qualification journey with help, encouragement and assistance.

Benefits of AIA Achieve Academy:

©Getty images/iStockphoto

● Learn online from anywhere in the world on your phone, tablet or laptop ● Study at your own pace with complete flexibility ● Take control of your learning ● Study how you like to learn ● Structured support from AIA ● Work around your existing responsibilities ● Make your transition to a accountancy career much more achievable

If you have any questions about the AIA qualifications or Achieve Academy please contact AIA: join@aiaworldwide.com ●

AIAWORLDWIDE.COM | ISSUE 120

BUDGET

ISSUE 120 | AIAWORLDWIDE.COM

BUDGET

Autumn Budget 2021 summary This article sets out the highlights of the 2021 Autumn Budget.

he chancellor of the exchequer, Rishi Sunak, delivered the Autumn Budget on Wednesday 27 October 2021. This was Sunak’s third Budget and the tone was optimistic, despite the well-known challenges of coronavirus (Covid-19), the climate emergency and the rising cost of living due to higher energy costs and the supply chain crisis. The optimism was, in large part, based on the Office for Budget Responsibility’s revised forecast that the economy will return to pre-pandemic levels at the end of this year, sooner than expected. Anyone watching the news in recent weeks will be aware that many of the Budget details had been briefed to the media in advance. This resulted in the deputy speaker of the House of Commons, Dame Eleanor Laing, having to reprimand Sunak before he delivered the Budget to Parliament. Sunak acknowledged this criticism, saying he had “listened very carefully” to it. Headline-grabbing announcements included an increase in the national living wage, the cancellation of the expected rise in fuel duty and a cut to the universal credit taper rate. Despite continuing speculation that reform of inheritance tax and/or CGT capital gains tax have been on the cards, there were no major announcements for private client advisers. There were some more peripheral announcements; for example, on the capital gains tax payment window for disposals of residential property, tax avoidance measures and the confirmed increase in dividend rates. There were some announcements aimed at encouraging investment and supporting businesses and charities following the coronavirus pandemic, including a temporary extension to the £1 million annual investment allowance to 31 March 2023, increases in cultural tax reliefs and extensive reforms to business rates. There remains a focus on a newly independent UK setting its own path and making UK industries competitive in the global market in the post-Brexit world. Examples include reforming tonnage tax to ensure that the UK shipping industry “boosts the use of the UK flag”, extensive simplification to alcohol duties (now the UK is able to set its AIAWORLDWIDE.COM | ISSUE 120

own laws in this area) and a focus on freeports (with the first freeports being in Humber, Teesside and Thames). A reform of R&D tax credits also featured heavily in the Budget speech, although commentators have queried whether a new requirement for R&D activities to be undertaken in the UK could have an adverse effect on investment in innovation. Despite the UK hosting the COP 26 climate change summit, environmental tax measures were surprisingly minimal. The chancellor announced an increase to air passenger duty for long-haul flights but reduced the rate for domestic flights. The Budget document affirms the government’s commitment to “leaving the environment in a better state than we found it”. There was little in the way of tax rises, perhaps because such rises have already been announced (for example, the rise in the corporation tax rate announced at Spring Budget 2021 and the health and social care levy announced on 7 September 2021). Tax technical announcements were also thinner on the ground than in previous Budgets. This may be because the government has announced that we can expect a further set of tax administration and maintenance announcements later in the autumn, in a similar way to the “tax day” that followed Spring Budget 2021.

Personal tax Tax rates and allowances for 2022/23

As already legislated for, the personal allowance of £12,570 and the basic rate limit of £37,700 are frozen at current levels up to and including 2025/26. Basic rate, higher rate and additional rate income tax will remain at 20%, 40% and 45% respectively for 2022/23. The additional rate threshold will remain at £150,000. The capital gains tax annual exempt amount will remain at £12,300 up to and including 2025/26. Capital gains tax rates are unchanged for 2022/23. The main income tax rates and bands apply equally across the UK, except that Scotland has its own rates and rate bands, to be set for 2022/23 by the Scottish Parliament at its Budget on 9 December 2021, and the Welsh Parliament

BUDGET could also modify income tax rates for Welsh taxpayers at its Budget on 20 December 2021. The starting rate for savings limit (applicable throughout the UK) will remain at £5,000 for 2022/23, and the starting rate itself at 0%. The personal savings allowance also remains unchanged. Inheritance tax thresholds and rates are unchanged, and the nil rate band is fixed until April 2026.

Dividend tax rates

As announced to Parliament by the prime minister on 7 September 2021, the three income tax rates applied to dividend income will each increase by 1.25 percentage points for 2022/23 onwards. These rates have effect throughout the UK. The dividend allowance, also known as the nil rate band, will remain unchanged at £2,000. The increases are intended to help fund health and social care. HMRC’s policy paper notes that they “will also help to limit the incentive for individuals to set up a company and remunerate themselves via dividends, rather than as wages, to reduce their tax bill”. The rates are:

Van benefit charge and fuel benefit charges for cars and vans

The government will legislate in Spring 2022 to clarify that payments made through the household support fund will be exempt from income tax.

2022/23

Dividend ordinary rate (dividends within the basic rate band)

7.5%

8.75%

Dividend upper rate (dividends within the higher rate band)

32.5%

33.75%

Dividend additional rate (dividends above the higher rate limit)

38.1%

39.35%

NICs rates and thresholds

The government will use the September Consumer Price Index (CPI) figure of 3.1% as the basis for uprating National Insurance limits and thresholds, and the rates of Class 2 and 3 National Insurance contributions, for 2022/23. However, as previously announced, the upper earnings limit and upper profits limit will be maintained at 2021/22 levels, in line with the higher rate threshold for income tax. The government has already legislated for a 1.25% health and social care levy (HSCL) from 6 April 2023, to fund investment in the NHS and social care. It will apply to all income to which Class 1 (both primary and secondary), Class 4, Class 1A and Class 1B NIC is charged, as well as to employment income of those over the state pension age. For 2022/23, the relevant NIC rates will be raised by 1.25% for one year, except for those over the state pension age.

Income tax treatment of household support fund payments

Household support fund payments will help vulnerable households with essentials over the coming months, as the country continues its recovery from the coronavirus pandemic. The government will legislate in Spring 2022 by Statutory Instrument to clarify that payments made through the fund, and through similar schemes in the devolved administrations, will be exempt from income tax. No income tax will be collected on payments made from October 2021 to the date the legislation takes effect.

ISAs, junior ISAs and child trust funds 2021/22

It is now confirmed that the dividend trust rate will also increase from 38.1% to 39.35%. The main trust rate is unchanged at 45%. It is also confirmed now that the increased dividend upper rate will apply for charging tax under Corporation Tax Act 2010 s 455 on loans to participators in close companies.

The van benefit charge and the car and van fuel benefit charges for 2022/23 will increase by the September 2021 CPI. The van benefit charge will increase to £3,600, the multiplier for the car fuel benefit will increase to £25,300, and the van fuel benefit charge will increase to £688.

The annual subscription limits for ISAs, junior ISAs and child trust funds will remain unchanged for 2022/23, so the limit for ISAs will be £20,000, and the limit for junior ISAs and child trust funds will be £9,000.

Increase in normal minimum pension age

Legislation to be included in Finance Bill 2022 will increase the normal minimum pension age, the earliest age at which most individuals can access their pensions without incurring an unauthorised payments tax charge, from 55 to 57. The increase will have effect from 6 April 2028.

Pensions tax relief administration: top-up for low earners in net pay arrangements

The government will introduce a system to make top-up payments directly to lower earners (those with taxable incomes below the personal allowance) who are saving in pension schemes using a net pay arrangement (NPA) from 2024/25 onwards. These top-ups will be paid after the end of the relevant tax year, with the first payments being made in 2025/26 and continuing thereafter. This corrects an anomaly whereby employees contributing to relief at source schemes receive a top-up at 20% on their pension contributions, even if they pay no, or a lower rate of, income tax. In contrast, employees contributing to an NPA scheme receive tax relief at their marginal rate, which for low earners is 0%.

Business tax Residential property developer tax

The government had previously announced a new residential property developer tax as part of its measures to address unsafe cladding on high-rise buildings. It will apply with effect from 1 April 2022 to the relevant profits arising on or after this date of companies undertaking residential property development activities. It was confirmed ISSUE 120 | AIAWORLDWIDE.COM

BUDGET comprehensive vehicle type approval scheme (due to be introduced in 2022) when determining the level of a vehicle’s CO2 emissions. Similar amendments will be made to company car tax and vehicle excise duty (VED). For capital allowances, the legislation will also confirm the applicable CO2 emissions figure to be used as that arising from the Worldwide Harmonised Light Vehicle Test Procedure. For capital allowances and company car tax, the legislation will take effect following Royal Assent. For VED, it will have effect for licences taken out on or after 3 November 2021.

Research and development

in the Budget that the tax will be charged at 4% on profits exceeding an annual allowance of £25 million.

Basis period reform

As announced in the summer, the government is to legislate in Finance Bill 2022 to reform the basis period rules for self-employed individuals and partners. A business’s profit or loss for a tax year will be the profit or loss arising in the tax year itself, regardless of the accounting date of the business. On transition, all basis periods will be aligned to the tax year and all outstanding overlap relief given. The draft legislation published on 20 July 2021 will be revised to incorporate suggestions following consultation, including more flexible use of overlap relief in the transitional year and provisions to reduce the impact of transition profits on allowances and benefits. The principal change from the summer announcement though is that the reform will take place one year later than originally planned. The new rules will now come fully into force on 6 April 2024, with 2023/24 being the transitional year.

Capital allowances

The annual investment allowance (AIA) had previously been increased temporarily from £200,000 to £1 million, but this was due to end on 31 December 2021. The increase will now extend for a further 15 months until 31 March 2023 for both income tax and corporation tax. As always when the AIA changes, there will be transitional rules to determine the AIA available for accounting periods spanning the date of change, now 1 April 2023. Legislation will be included in Finance Bill 2022 to amend the capital allowances legislation to allow for vehicles certified through a new AIAWORLDWIDE.COM | ISSUE 120

From April 2023, research and development (R&D) tax reliefs will be reformed to support modern research methods by expanding qualifying expenditure to include data and cloud costs. These changes will be legislated for in Finance Bill 2023 and take effect from April 2023. Further details of these changes and the next steps for the review will be set out in due course.

Corporate loss relief

Legislation will be introduced (to apply retrospectively for accounting periods beginning on or after 1 January 2019) to ensure that companies adopting IFRS 16 continue to benefit from the exemption from the loss carry forward restriction for companies in financial distress. These changes will allow companies that are required to adopt IFRS 16 to benefit from an increase in the deductions allowance where they enter into lease renegotiations to avoid insolvency. This will ensure that companies accounting under both the pre-existing accounting standards and IFRS 16 will, in substance, benefit from the same treatment.

Cross-border group relief

The increase to the annual investment allowance will now extend for a further 15 months until 31 March 2023 for both income tax and corporation tax.

For accounting periods ending on or after 27 October 2021, the existing beneficial crossborder group relief rules relating to EEA-resident companies are repealed. This is as a result of the UK’s exit from the European Union. Group relief rules relating to EEA-resident companies are to be brought into line with those for nonUK companies resident elsewhere in the world so that all non-UK resident companies can only surrender as group relief losses of a UK permanent establishment if it is not possible for the loss to be deducted from non-UK profits of any person for any period. Transitional arrangements will apply for accounting periods that straddle this date.

Diverted profits tax

Two changes relating to the administrative aspects of the diverted profits tax (DPT) were announced, both of which will have effect from 27 October 2021. First, DPT will now be included as a tax covered by the UK’s double taxation treaties, and so mutual agreement procedure (MAP) outcomes will be able to be implemented for companies that have sought relief from DPT

BUDGET under this procedure. The interaction between the DPT review period and company tax return enquiries will also be rationalised. This will be achieved by extending the time period in which a company tax return can be amended where there is a DPT review from the first 12 months of the DPT review period to the whole of the review period, other than the final 30 days. It will also not be possible for a closure notice for an enquiry into a company tax return to be given until the end of the DPT review period.

Real estate investment trusts

From 1 April 2022, changes will be introduced in relation to the tax rules applying to real estate investment trusts (REITs), including some of the conditions that determine whether a company qualifies to be a UK REIT. The underlying objective of this measure is to alleviate certain constraints and administrative burdens to enhance the attractiveness of the UK REIT regime for real estate investment. Key changes include: ● removal of the requirement for REIT shares to be admitted to trading on a recognised stock exchange in cases where institutional investors hold at least 70% of the ordinary share capital in the REIT; ● amending the rules requiring that at least 75% of a REIT’s profits and assets relate to property rental business (the “balance of business test”) to disregard non-rental profits arising because a REIT has to comply with certain planning obligations, and to ensure the items currently specified as excluded from the profits part of the test are disregarded in all parts of the test; and ● introduction of a new simplified balance of business test so that, if group accounts for a period show that property rental business profits and assets comprise at least 80% of group totals, a REIT will not have to prepare the additional statements that would be required to meet the full test.

Creative industries

A range of measures were announced in relation to the three “cultural” tax reliefs (theatre tax relief (TTR), orchestra tax relief (OTR) and museums and galleries exhibition tax relief (MGETR)). From 27 October 2021, there is a temporary increase in the rate of the three cultural tax reliefs, as follows: ● TTR and MGETR: rates will increase to 45% (for non-touring productions) and 50% (for touring productions) respectively. From 1 April 2023, the rates will be 30% and 35%, and rates will return to 20% and 25% on 1 April 2024; and ● OTR: rates will increase to 50% for expenditure taking place from 27 October 2021, reducing to 35% from 1 April 2023, and returning to 25% from 1 April 2024.

From 1 April 2022, changes will be introduced to real estate investment trusts, including some of the conditions that determines whether a company qualifies to be a UK REIT.

From the date of Royal Assent to the Finance Bill 2022, the MGETR relief will be available until 31 March 2024 ― this relief was due to expire in March 2022. From 1 April 2022, film productions qualifying for film tax relief (FTR) that change during production to instead meet the criteria for high-end television tax relief (HETV) will be able to continue claiming FTR without losing their right to access tax relief, which will benefit film productions in the longer term.

Bank surcharge

For accounting periods beginning on or after 1 April 2023, the bank surcharge rate will be reduced to 3% (from 8%) and the surcharge allowance will be increased to £100 million (from £25 million). Where a company’s accounting period straddles 1 April 2023, the period will be split on a time apportionment basis for the purposes of the allowance and the reduced rate. A review of the surcharge was announced at Spring Budget 2021. When this rate change is taken alongside the increase in the headline rate of corporation tax from 19% to 25% from April 2023, banks will be taxed at a combined rate of 28% on their profit.

Asset holding companies

From 1 April 2022, a new tax regime for qualifying asset holding companies (AHCs) and some of the payments they make will be introduced. The regime will apply to certain AHCs that are used in a range of collective and institutional investment structures to hold investment assets. It will also apply to investment funds, institutions and individuals that invest in these structures. The broad intention behind this regime is to ensure UK competitiveness as a location for asset management and investment funds. It operates so that investors are taxed broadly as if they had invested in the underlying assets and the intermediate holding companies pay no more tax than is proportionate to the activities they perform. The regime will exempt from tax: ● gains on share disposals and overseas property disposals; and ● profits of an overseas property business of a qualifying AHC, where those profits are subject to tax in an overseas jurisdiction. The following provisions will also be modified: ● the late paid interest rules so that, in certain situations, interest payments are relieved in the qualifying AHC on the accruals basis rather than the paid basis; ● the deeply discounted securities rules for corporates so that, in certain situations, the discount arising on any such security issued by the qualifying AHC is relieved on the accruals basis rather than the paid basis; ● the transfer pricing exemption for small and medium-sized enterprises and adjustment of the participation condition to ensure the ISSUE 120 | AIAWORLDWIDE.COM

BUDGET transfer pricing rules apply appropriately in relation to a qualifying AHC; ● the deduction regime for interest payments so that deductions for certain interest payments that would usually be disallowed as distributions (along with necessary consequential changes to the hybrids rules) are allowed, and in certain circumstances the obligation to deduct a sum representing income tax at the basic rate on payments of interest is disapplied; ● the buy-back of share capital rules so that when a qualifying AHC repurchases its share capital from an individual, premiums paid will be allowed to be treated as capital rather than income distributions. In addition, repurchases by a qualifying AHC of share and loan capital that it previously issued will be exempt from stamp duty and stamp duty reserve tax (SDRT); ● the remittance regime so that certain amounts paid to qualifying remittance basis users by a qualifying AHC are able to be treated as non‑UK source, reflecting the underlying mix of UK and overseas income and gains; and ● CGT and accounting provisions in relation to entry and exit from the regime, including the rebasing of certain assets and the creation of a new accounting period. The regime will also include administrative provisions and provisions to guard against potential for abuse or avoidance.

VAT and indirect taxes Implementation of VAT rules in free zones This measure, which is to take effect from 3 November 2021, will affect VAT-registered businesses authorised to operate in the customs site (free zone) of a freeport. The main VAT benefit of operating in a free zone is that businesses selling goods within free zones can zero-rate their supplies, and services carried out on goods in those zones may also be zero-rated subject to conditions, which provides a cash flow advantage. This measure will ensure that where goods leave a free zone and there is no qualifying onward supply of the goods, or where there is a breach of the rules of the free zone customs procedure, VAT will be due.

VAT exemption for dental prostheses imports

This measure, which is to apply retrospectively from 1 January 2021, will affect registered dentists and other dental care professionals: ● importing dental prostheses into the United Kingdom; and ● moving or supplying dental prostheses between Great Britain and Northern Ireland. The measure is intended to remedy an unintended consequence of the Northern Ireland Protocol and is being retrospectively applied AIAWORLDWIDE.COM | ISSUE 120

to ensure there is no gap in the fiscal position that existed prior to the end of the transition period. It introduces a VAT exemption for the importation into the United Kingdom of dental prostheses and ensures that supplies of dental prostheses by registered dentists and other dental care professionals will continue to be exempt between Great Britain and Northern Ireland.

Businesses trading in second-hand motor vehicles in Northern Ireland

Under the Northern Ireland Protocol, motor vehicle dealers in Northern Ireland may not use the VAT margin scheme for second-hand vehicles when vehicles are purchased in Great Britain and must therefore account for VAT on the full selling price. Two measures have been announced with the intention of remedying changes to the VAT treatment of Northern Ireland businesses that deal in second-hand vehicles sourced in Great Britain. One of the measures is described as an interim arrangement and is intended to provide for the use of the VAT margin scheme for sales in Northern Ireland of motor vehicles sourced in Great Britain. The other measure is intended to enable the introduction of a second-hand motor vehicle export refund scheme to allow businesses that buy used motor vehicles in Great Britain that are moved for resale in Northern Ireland or the European Union to claim a refund equivalent to the VAT on the price paid. This should put businesses in a similar financial position to having access to the VAT margin scheme for these second-hand vehicles.

VAT treatment of fund management fees

Autumn Budget 2021 included an announcement that there will be a consultation on options to simplify the VAT treatment of fund management fees in the coming months.

Air passenger duty

The following changes to air passenger duty are to take effect from 1 April 2023: ● a new domestic band for air passenger duty covering flights within the UK; and ● a new ultra-long-haul band, covering destinations with capitals located more than 5,500 miles from London. The rates the for the new domestic band will be £6.50 for those travelling in economy class, £13 for those travelling in all other classes, and £78 for those travelling on aircraft with an authorised take-off weight of 20 tonnes or more with fewer than 19 seats. The rates for the new ultra-long-haul band will be £91 for those travelling in economy class, £200 for those travelling in all other classes, and £601 for those travelling on aircraft with an authorised take-off weight of 20 tonnes or more with fewer than 19 seats. ● Produced by Tolley

Businesses selling goods within free zones can zero rate their supplies, and services carried out on goods in these zones may also be zero rated subject to conditions. 15

ACCOUNTING STANDARDS

Choosing the right path Steve Collings examines the two main accounting standards – FRS 102 and FRS 105 – and asks how small businesses should decide which to apply

Steve Collings Partner, Leavitt Walmsley Associates Ltd

he two “main” accounting standards in the suite of UK GAAP consist of: ● FRS 102: The Financial Reporting Standard applicable in the UK and Republic of Ireland; and ● FRS 105: The Financial Reporting Standard applicable to the Micro-entities Regime.

Both standards are applied widely throughout the UK and Republic of Ireland and questions often arise as to the suitability of each standard depending on whether the client is a micro-entity or small entity. At the outset, it is worth noting that FRS 105 is an optional standard. Just because a micro-entity may be eligible to use FRS 105 does not mean it is mandated to (and there are genuine reasons why FRS 105 may not be appropriate to a microentity). FRS 105 should therefore be considered on a case by case basis.

FRS 102

FRS 102 contains a separate section in the form of Section 1A Small Entities. Section 1A only deals with the presentation and disclosure requirements for a small entity. Recognition and measurement principles are dealt with in full FRS 102. Hence, Section 1A is not a “one-stop shop”. The benefit of having this is that if a small company outgrows Section 1A (i.e. it becomes, say, a medium-sized entity), then the disclosure requirements become more comprehensive as they will be based on individual sections of FRS 102 rather than Section 1A. However, the recognition and measurement of amounts remain the same as when the company was small; hence this avoids a transition to another alternative framework. FRS 102 Section 1A contains the disclosures required by company law. The section itself is

optional – a small company need not apply Section 1A if it does not wish to, although most small entities do choose to apply Section 1A in practice. Also, keep in mind that Section 1A contains five encouraged disclosures in Appendix E which must not be disregarded. The same recognition and measurement principles will apply to all entities, regardless of size, that report under FRS 102 (with one exception for small entities discussed ISSUE 120 | AIAWORLDWIDE.COM

ACCOUNTING STANDARDS para 11.13A and relates to a loan to a small entity. It allows a small entity which receives a loan from a person who is within a director’s group of close family members (as defined in the Glossary to FRS 102), when that group of close family contains a least one shareholder, to recognise the loan at transaction price (i.e. at cost). This is an accounting policy choice. In practice, this would apply to a loan provided to a small entity that is covered by formal terms and which is at below market rates of interest. The exception in para 11.13A means that the small entity does not have to impute a market rate of interest and then discount the loan on initial recognition using that imputed rate of interest. If the loan is not covered by formal loan terms (as is the case for most of these sorts of transactions within a small entity), then the loan would not be discounted anyway because it would be considered as being repayable on demand, so the loan would be recognised as a current liability in the small entity’s financial statements.

FRS 105

FRS 105 is viewed as a “compliance framework” rather than a “true and fair framework”. The standard is prescriptive and includes much simpler recognition and measurement principles, and a vastly reduced disclosure regime (for UK-based micro-entities at least). There is only one format permitted for the profit and loss account (a Format 2 profit and loss account which presents expenses by nature). A notable feature of the micro-entities framework is the presumption in law that if the micro-entity’s financial statements are prepared in accordance with the minimum legal requirements (i.e. FRS 105), the financial statements are presumed to give a true and fair view. The directors need not consider making any additional disclosures, beyond those required in the standard, to achieve a true and fair view. Other notable simplifications in FRS 105 are shown in the table on the next page.

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Transitioning between frameworks

Author bio

Steve Collings is the audit and technical partner at Leavitt Walmsley Associates Ltd.

Applying the correct financial reporting framework at the outset cannot be overemphasised. Over the years, a common question asked by some practitioners is whether FRS 102 could be applied in year 1, then, if appropriate, FRS 105 in year 2, followed by a switch back to FRS 102 in year 3 and so on. This is not how the standards are designed to work and would create unnecessary work in having to do regular transitions.

©Getty images/iStockphoto

below). Therefore, an entity which could qualify as a micro-entity but instead chooses to report under FRS 102 will use the same recognition and measurement principles as a large entity. You cannot “cherry pick” between standards, so a micro-entity that chooses to report under FRS 102 cannot then apply certain provisions of FRS 105 to suit its needs. It is one or the other. There is one exception to full recognition and measurement principles. This is available only to small entities (including small LLPs) in FRS 102

ACCOUNTING STANDARDS Notable simplifications in FRS 105 Borrowing and development costs

All borrowing and development costs must be expensed. There is no option to capitalise them.

Deferred tax

Micro-entities are prohibited from accounting for deferred tax. Hence, micro-entities’ financial statements should not present deferred tax balances.

Defined benefit These are accounted for in the same way as defined pension plans contribution plans; i.e. contributions into the plan are accounted for as an expense. A liability is recognised in respect of any agreements to fund a deficit (a schedule of contributions) because the pension obligation is not reported on the micro-entity’s balance sheet. Equity-settled share-based payments

Micro-entities need not account for equity-settled share‑based payments prior to the issue of the shares. (This is because of the prohibition in using fair values, noted below, and the lack of disclosure.)

Financial instruments

Micro-entities are not required to use the amortised cost and effective interest method as these methods are considered to be too onerous; hence financial instruments are effectively recognised and measured at cost.

Foreign currency There is no distinction between functional and presentation currency and the micro-entity must use contracted rates to translate assets and liabilities denoted in a foreign currency as opposed to closing rate. Government grants

Government grants are measured under the accrual model. The performance method of grant recognition (which recognises the grant immediately in profit or loss if performance-related conditions have been met) is prohibited under FRS 105.

Hyperinflation

The accounting issues relating to hyperinflation are not included in FRS 105 as hyperinflation is unlikely to be an issue for micro-entities.

Recognition This requirement is removed in FRS 105 because they are of separately not required items in the financial statement formats. identifiable intangible assets in a trade and asset acquisition Revaluations and fair value amounts

Micro-entities cannot revalue assets, nor can they apply fair value accounting. This is because use of the Alternative Accounting Rules and Fair Value Accounting Rules is prohibited in the micro-entities legislation.

Specialised activities

These consist only of agriculture. Activities such as extractive industries, service concessions, heritage assets and funding commitments are unlikely to apply to micro-entities.

Some micro-entities do naturally outgrow FRS 105 and therefore will need to transition to FRS 102 as a matter of course. A micro-entity (which is eligible to use FRS 105) should consider all the benefits and drawbacks of the standard before deciding on applying it. If, for example, the micro-entity has an investment property on the balance sheet and the directors want to reflect the property’s fair value at each reporting date, FRS 105 will not be appropriate because the investment property must be measured at cost less depreciation less impairment. To enable measurement of the investment property at fair value, the entity would have to report under FRS 102, including applying Section 1A if it wishes. Similarly, if an entity has a history of revaluing certain fixed assets, then FRS 105 may also not be appropriate as revalued amounts cannot be used under the standard. Some micro-entities do naturally outgrow FRS 105 and therefore will need to transition to FRS 102 (including applying Section 1A, if applicable) as a matter of course. Conversely, some small entities will naturally contract and hence become eligible to use FRS 105 if they wish. Whenever there is a switch between financial reporting frameworks, a transition must be carried out. This involves restating the transition date balance sheet (i.e. the opening balance sheet position at the start date of the comparative year) and then restating the closing comparative year to comply with the requirements of FRS 102 or FRS 105. For example, if transitioning from FRS 102 to FRS 105, all fair value and revalued amounts must be removed from the date of transition and in the closing comparative year. Deferred tax balances must also be removed. Conversely, if moving from FRS 105 to FRS 102, there are additional accounting policy options that will need to be considered (e.g. whether to revalue assets or capitalise development costs). There are also mandatory requirements that must be considered, such as measuring investment property at fair value through profit or loss and accounting for deferred tax.

Conclusion

This article has considered some of the more notable issues relating to FRS 102 and FRS 105 and how they interact with each other – especially when it comes to transitioning between the frameworks. The article does not cover every eventuality and preparers must, therefore, have a sound understanding of the differences of each framework to advise their client of the most appropriate framework correctly. ● ISSUE 120 | AIAWORLDWIDE.COM

ENVIRONMENTAL TAXES

Can tax save the polar bears?

©Getty images/iStockphoto

Christy Wilson asks whether the lack of cohesion in our environmental taxes will make it even harder to save our ecosystems. Christy Wilson Tax Associate, Katten Muchin Rosenman UK LLP

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ENVIRONMENTAL TAXES

©Getty images/iStockphoto

e are in the midst of a global climate crisis. Our actions, now more than ever before, are having a direct and tangible impact on our environment. So, what are we doing to save the planet? Could our taxation system help to save our ecosystems? The power of tax lies in the fact that it is ubiquitous and can infiltrate any aspect of financial or commercial activity. Moreover, increases and decreases in tax rates can shape the behaviour of individuals and businesses. A good example of the influence of tax rates is the stamp duty land tax break during this year, which created a surge in the sales and purchases of properties around England. This is just one of many instances where we can see that tax is affecting behaviour.

The polluter pays principle

There are different concepts that we can use as a basis for a tax system that makes significant strides towards net zero. One example is the “polluter pays” principle. As the name suggests, this concept encourages higher taxation for those that are big polluters. Logically it makes sense – it creates accountability for big polluters and should encourage a change in behaviour and business patterns. For instance, the shipping industry accounts for more than 2% of global emissions. There is pressure building to impose a significant carbon tax on the shipping industry to motivate ship owners to invest in greener technology and take responsibility for their part in the climate crisis. However, in order for this principle to work, the tax system has to stop encouraging polluting behaviour elsewhere. It is inherently contradictory for a government on the one hand to discourage some polluting activities through increased taxation, while on the other hand still investing in and promoting other polluting activities. Furthermore, financial incentives that promote investment in environmentally friendly actions are entirely pointless if their positive impact is outweighed by continuing investment in environmentally negative behaviour.

Impact of air passenger duty changes

The Autumn Budget for 2021 was released on 27 October. Many commentators were expecting some big and meaningful tax changes that would help the UK to reach net zero. In fact, the budget was a disappointment, given the magnitude of the climate crisis. The government did announce a higher rate of air passenger duty (APD) on ultra-long haul flights. This is likely to impact less than 5% of passengers. Additionally, the government announced lower rates of APD on domestic flights – this will impact around 13% of

There are different concepts that we can use as a basis for a tax system that makes significant strides towards net zero.

passengers. The Office for Budget Responsibility estimates there will be around 23,000 fewer ultra-long haul flights and 410,000 more domestic flights. Clearly, a higher duty rate for ultra-long haul flights is a positive thing and very much aligns with the “polluter pays” principle as it is a duty that targets flights that produce the highest levels of emissions. Whilst the decrease in APD on domestic flights seems counterintuitive for environmental purposes, all is not lost. Domestic flights come within the scope of the UK Emissions Trading System (ETS). The ETS monitors and caps the level of emissions that are produced by different industries, aviation included. This means that the decrease in APD of domestic flights will not add to the greenhouse emissions of the UK as a whole because the carbon emissions of the UK must still come under the cap. However, this will mean that there will be an increase in the number of permits for domestic aviation purposes under ETS. This could result in a larger percentage of permits being used for aviation with a consequent reduction in the number of permits available for other sectors (e.g. energy) to acquire. Further down the line, this will create an unsustainable demand in other sectors as there will not be enough permits. In order to reduce demand, there may need to be tax increases in these other sectors. Whilst the change in APD does not in itself contribute to an increase in the UK’s emissions, it obviously does not actively decrease emissions. In fact, the APD reduction only defers real action until such a time as there is uncontrollable demand for ETS permits. ISSUE 120 | AIAWORLDWIDE.COM

ENVIRONMENTAL TAXES An inconsistent approach

The budget also introduced some other environmentally positive measures. For example, there is a new investment relief for businesses investing in green technology. Nevertheless, in contrast, the level of fuel duty was frozen, not raised. This is an example of the inconsistencies that ultimately result in a failure to realise the full potential of the taxation system to combat climate change. Additionally, earlier this year the government announced that it would introduce a plastic packaging tax (PPT). Plastic packaging that contains less than 30% recycled plastic content will be taxed at £200 per tonne. This will take effect from 1 April 2022. This tax definitely creates a level of accountability for companies, but its execution still needs to be improved. There is an anomaly in HMRC guidance that somewhat undermines the purpose of PPT. HMRC recently updated its guidance on PPT to confirm that there will be no requirement to show the amount of PPT paid on an invoice – this is only “encouraged” but is not mandatory. This seems contradictory to the very nature of the tax. Whilst it should encourage businesses to reassess their use of plastic, it is fair to say that another intention of this tax is to reduce the demand for non-recycled plastic. However, to conceal the application of PPT by not including

this information on an invoice frustrates this intention. Hopefully, HMRC will change its guidance at some point so that there will be more awareness about the use of plastic in the packaging of products and as such facilitate businesses to make informed decisions that take environmental factors into account.

In summary

Overall, the UK tax system has been used to some extent to bring about positive environmental developments. Nevertheless, the tax system can definitely be targeted more towards supporting the UK’s drive to achieve net zero. There is an evident lack of coherence. The UK tax system has positive elements that help with environmental repercussions but the system pulls in too many directions. As mentioned, there cannot be any real traction in holding polluters accountable unless there is complete uniformity. The efforts of the government to use tax to make environmental changes are somewhat uninspiring. Tax legislators wield a lot of power as the tax system can fundamentally change the shape of business activity and consumer behaviour. Undeniably, tax has the potential to help save the polar bears, but the UK government needs to use it in an intentional and coherent way in order to maximise its impact. ●

Author bio

Christy Wilson is a tax associate in the Transactional Tax Planning practice at Katten Muchin Rosenman UK LLP.

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CHARITIES

The risks of financial crime David Potts considers the varied dangers that charities face from financial crime and how they can do their best to avoid them. David Potts Director of Operations, AIA

harities can face financial crime risks due to the nature of their activity, especially when operating internationally or in areas of economic and social upheaval. These risks must be assessed and controlled in order to avoid providing a vehicle for illicit funds or criminal activity. Charitable organisations working internationally often face acute challenges which make them more vulnerable to financial crime, including fraud, theft, looting, money laundering and terrorist financing. All charities are at risk of fraud and cybercrime and should take practical actions to protect themselves from harm: ● One in 13 people fall victim to fraud each year (see bit.ly/3D44QDO). ● Cybercrime is on the rise, exacerbated by the pandemic (see bit.ly/30h7HuL). ● The average organisation loses 5% of revenue to fraud each year (see bit.ly/3bZBzOM). ● Under 9% of charities have fraud awareness training in place (see bit.ly/3ofPMN5). If organisations are fraud aware and resilient, this helps to maintain public trust and confidence. Also, money which is lost to fraud and cybercrime cannot as a result be spent on charitable causes.

Types of financial crime Fraud, theft and looting

Author bio

David Potts is director of operations at the AIA.

Some charities working internationally face an increased risk of fraud, theft and looting because of the complexity of working across borders, where there may be fewer controls or where local conditions make it more challenging to apply controls. Moving funds overseas can often increase these risks because of conversion to other currencies, conversion of cash into goods and back again and, in some areas, unregulated local customs and practices and the absence of formal banking systems.

Money laundering

This usually involves the receipt of illicit funds which are then paid out into the legitimate economy, perhaps in different amounts, to different people and in different forms and currencies. For example, in order to transfer illicit funds overseas and disguise their origin, donors may make donations to charities and apply specific restrictions regarding which partner or project is to be funded. Charities can accept donations with conditions attached, but only if those conditions are compatible with the charity’s purposes, priorities and activities and are not illegal.

Terrorist financing

Charities working internationally may be operating in unstable or challenging territories, where the risks of abuse for terrorist purposes are higher. For example, proscribed groups may be active in the area or there may be financial sanctions in place. The Terrorism Act 2000 includes duties to report any suspicions or beliefs regarding terrorist financing offences.

Common risks

The UK government’s National Risk Assessment of Money Laundering and Terrorist Financing 2020 indicates that there has not been a significant change in the vulnerabilities or mitigations f the charity or wider non-profit organisation sector to terrorist financing since the 2017 National Risk Assessment. These vulnerabilities are not spread equally across the sector. Rather, among the large number of charities which operate internationally, a significantly higher risk continues to face the ISSUE 120 | AIAWORLDWIDE.COM

CHARITIES

Five steps to reduce the risks

small number of charities that operate in or in close proximity to conflict zones. These charities are likely to be exposed to the greatest risk of abuse through misappropriation of legitimate donations by individuals, including nationals stripped of their citizenship due to their prior or continued links or association with terrorist groups, or individuals acting as a partner to the charities themselves. Other inadvertent forms of abuse occur though skimming, incidental theft or opportunistic looting, such as: ● working in conflict areas or unstable environments where there is little infrastructure and greater security risks; ● delivering activities across different cultures and customs, where illegal activities such as bribery may be seen as the norm; ● having more complex financial operations which may include multiple donors and currencies, often receiving and using cash or undertaking informal money transfers; and ● using intermediary partner organisations to deliver services and/or working overseas directly themselves. In the context of the global public health crisis in 2020, the Financial Action Task Force (FATF) has highlighted the crucial work of charities around the world to combat Covid-19 and its effects. The UK government also continues to recognise the work of charities in providing vital services, as well as the difficulties faced in providing that assistance.

Taking action

If you suspect a fraud or other financial crime has occurred, you must act promptly. AIAWORLDWIDE.COM | ISSUE 120

Following these five simple steps can help you to reduce the risk of falling victim to financial crime while working abroad. 1. Assess your risks: Risks will depend on the size, nature and complexity of your activities. Risk assessments are a fundamental part of how charities plan, manage and respond to risk and should be conducted regularly. 2. Have internal financial controls: Internal financial controls play an important part in managing risks and should be followed. When reviewing controls, you should take into account changes in the charity’s structure, activities and area of operation that could affect the risks to the charity. 3. Conduct due diligence on donors, beneficiaries and partners: Charities need to know where their funds come from, how they are applied and who is involved in delivering activities. Performing due diligence will help to ensure that individuals and organisations are appropriate for the charity to be involved with and manage any associated risks. 4. Monitor the end use of funds: Keeping audit trails and proper records evidencing the movement of funds helps your charity to account for its income and expenditure. Proactive monitoring can help to confirm that charitable funds are being used as intended. 5. Train staff and volunteers: Training should be provided to ensure that staff and volunteers are familiar with financial controls and know what actions to take if they suspect financial crime. Partners, staff or volunteers working internationally should also receive targeted training on managing risks they may face in specific territories. Other resources The Charity Commission for England and Wales has produced a range of resources covering this area. See “Protecting charities from harm: compliance toolkit” (see bit.ly/31DUaOg). The Prevent Charity Fraud website contains resources to help charities prevent, detect and respond to fraud (www. preventcharityfraud.org.uk). Cyber Security for Small Organisations interactive training from the National Cyber Security Centre (see bit.ly/3F3EXo9). Further information is available on AIA’s Charities Hub (see bit.ly/3D4aAxm).

● Follow procedure and have a response plan so that everyone knows what to do and when. ● Take reasonable steps to preserve evidence, as it may be needed for investigative or legal proceedings. Consider whether it is appropriate to seek professional legal advice. ● Report the incident to your relevant national law enforcement agency and any local law enforcement agency (if abroad). ● In the UK, it may need to be reported to Action Fraud (England, Wales and Northern Ireland), Police Scotland (Scotland) and/or the National Crime Agency depending on the incident. Suspision or belief of a money laundering or terrorist financing offence should be reported immediately. ● Report matters promptly to your charity regulator; e.g. the Charity Commission for England and Wales. Use the online form to make your report and complete it fully.

Building your charity’s defences

Ask yourself: ● Do we understand how the social, political and economic conditions of the countries we work in might affect our exposure to financial crime risks? ● Do we have robust financial controls and governance in place, or are additional safeguards required? ● Is due diligence performed on donors, beneficiaries, partners and staff, and is it proportionate to the risks involved? ● Do we monitor how our funds are spent and keep records of all monitoring activities, including site visits and their outcomes? ● Are staff made aware of financial crime risks and how to spot and report them? ●

CORPORATE SIMPLIFICATION

Clear out “A your garage Eddie Bines explains how business structures can be unnecessarily complex and can benefit from a good, old fashioned clear out Eddie Bines Managing Director, Restructuring Advisory, Kroll

ny intelligent fool can make things bigger and more complex. It takes a genius and a lot of courage to move in the opposite direction.” Whilst I’m sure Albert Einstein was referring to complex physics when he made this assertion, his words are true for business generally and, more specifically, legal entity structures. Many corporates (not just large multinationals) seem to excel in making things unnecessarily complex by setting up more legal entities than they know what to do with. Of course, it’s not always intended to make matters complicated. Often, they were formed for specific operational or financial reasons or tax structuring purposes. Alternatively, they were acquired through M&A activity. Irrespective, it doesn’t take long for the group structure to grow and the corporate garage to get cluttered with bric-a-brac.

ISSUE 120 | AIAWORLDWIDE.COM

Time to declutter

It’s not uncommon for an organisation to have hundreds of companies in its structure. Even when these companies no longer serve an obvious purpose, groups often retain them, leaving them “as is” rather than toying with the status quo. Keeping such entities can be costly and risky (for the corporate itself and directors personally) and hamper the implementation of other strategic initiatives. Consequently, “clearing out the garage” is not something to continually postpone but to tackle head on in the near term either on its own or as a component of a wider strategic transformation or reorganisation initiative. Indeed, both during and as we emerge from the pandemic, many enterprises have been undertaking strategic reviews which have and will lead to the transformation of their operating model as they position themselves for business in the “new normal”.

Corporate simplification

We often find that companies will initiate a defined corporate simplification project to tackle some of these issues and complement other transformation initiatives, bringing the entity structure and operating model in closer alignment. When implemented successfully, execution is well planned, quick and can provide speedy payback. By clearing out the garage, you’re not only eliminating unnecessary entities, but also managing risk and making a leaner, more agile organisation to take into the future. So, what indicators should management look for when determining whether to progress corporate simplification efforts? In our experience, there’s no specific criteria. If you can’t describe your corporate structure internally, if it is hindering your corporate governance objectives, if it doesn’t match your organisational culture of transparency, if it takes up a whole wall in your office or if your employees are facing and raising day-to-day challenges caused by the complexity – those are some of the signs. You’ll have senior executives acting as directors of companies they know nothing about, swathes of dormant companies or intermediate holding companies creating unnecessary tiers in the group structure, or your finance team (and other functions) spending an inordinate amount of time supporting non-core entities.

What’s involved?

The question is then whether you have the capacity and energy to clear out the garage.

AIAWORLDWIDE.COM | ISSUE 120

Benefits of corporate simplification

● Reduced audit, tax, regulatory and other compliance costs ● Reduced internal costs associated with maintaining unnecessary entities: Executive, Finance, Legal, Company Secretarial and Human Resources will all benefit from focusing on core activities ● Mitigation of corporate risk and director personal risk associated with compliance failings, fading or lost corporate memory, potential contingent liabilities and misstatement in statutory accounts ● Improved governance and transparency (and therefore reduced impact of disclosure requirements and corporate governance reform). This is increasingly prominent in a world that demands legislation and guidance reform ● Resolution of issues resulting from unnecessary complexity such as tax inefficiency and dividend blocks ● Releasing capital tied up in balance sheets of individual entities ● Restricted scope and cost of future improvement and transformation efforts ● Synergies achieved through the alignment of the entity structure with operational activities Many have found this whilst operating remotely during the pandemic. If you do, you’ll find lost family treasures and previously unidentified wasp nests in the process. As the CFO/financial director, you want to avoid being challenged by the board or other senior management on the group structure and having to defend its complexities. Non-executive directors and newcomers to the senior management team may have a different perspective on what “good” looks like from working with other organisations and through looking at the organisation through a different lens. Furthermore, current and potential investors, finance providers, employees and other stakeholders will all value transparency and a group structure that is easily explained. Kroll has worked alongside clients of all sizes, ranging from entrepreneur-led privately owned businesses through to mid-market and globally listed corporates on corporate simplification initiatives. One that is properly planned and resourced can deliver a wide range of sometimes unexpected benefits for your organisation. The trick then is to ensure that those benefits are sustained through making corporate simplification business as usual, thereby facilitating long-term entity management. The moral of this story is to move clearing out the garage up your “to do” list. Identify where everything is, get rid of unnecessary clutter and put things where you want them. You’ll feel good about it, see the value in your achievement and be wary of letting it return to its previous state. ●

Author bio

Eddie Bines is a managing director in the Restructuring Advisory practice at Kroll.

CRYPTOCURRENCY

The new ‘digital gold’? William Je examines the role that digital currencies are likely to play in the future of international finance.

William Je CEO, Hamilton Investment Management Ltd

race to set up their crypto-related operations. Amongst these, Morgan Stanley and the Bank of America are launching their own cryptofocused research divisions. State Street revealed its dedicated digital finance division to the public, and following this, JP Morgan and Goldman Sachs have started rolling out their own crypto trading assistances and services.

What is an asset?

Our traditional understanding of an asset in finance terms is generally anything that is of worth to an individual or company. More specifically, it can be regarded as a resource “of value”, which can be in turn converted into cash. Typically, an asset can often generate cashflows. For instance, stocks can provide dividends, bonds can provide coupons, loans can provide interest, etc. ISSUE 120 | AIAWORLDWIDE.COM

inancial institutions and investors alike have been divided on the topic of whether cryptocurrencies should be considered as an asset class. This isn’t surprising considering that throughout the course of recent history cryptocurrencies went very quickly from being regarded as a channel for money laundering to becoming a serious proposition for investors. Cryptocurrency is now not just for opportune amateur investors, who have got caught up in the media hype. Even big businesses and knowledgeable entrepreneurs, such as Elon Musk, have their eyes on the digital currency and many consider it as genuine form of payment as a result. Now, we can see that major banks are also testing the crypto waters and are entering the

CRYPTOCURRENCY However, there are assets in existence that don’t tend to produce cashflows, but they’re still regarded as an important asset class. For instance, this can include assets such as gold, wine and even art. Gold is widely considered to be an important asset class by many, even though it has limited industrial use and therefore this doesn’t generate cashflows. However, the collective thought is that gold is valuable. This is what provides the value to the asset – an inflated artificial value that we give to a shiny lump of metal. In matter of fact, this can in turn apply to any fiat currency. Money is only a credit that a currency’s user gives to the issuer. Thereby, for a currency to prosper, belief and confidence is the most important factor for its success. The issuers of fiat currencies are sovereign entities which are deemed to be the most trustworthy. If an economic crisis occurs that leads to governmental distrust, the value of the fiat currency has the potential to drop substantially. In the past, financial institutions and investors have primarily recognised only “traditional” asset classes. They regard cash and equivalents, bonds, and stocks as the big three. However, since the rise of cryptocurrency (a decentralised means of digital currency) in our society, many have questioned whether it too should be regarded as asset class. This debate is more important now than ever before, especially as legislators and policymakers continue to ponder upon taxing cryptocurrency in line with other assets. Professionals must now begin to change their outlook on cryptocurrency and adapt their processes to enable investors to deal with it more effectively. Gone are the days of solely dealing with traditional assets.

Where does the value lie?

There is a broad consensus that bitcoin is the most valued – and thereby most appealing – cryptocurrency on the market. Experts have largely accredited this to its scarcity. Bitcoin, in particular, benefits from investor confidence because of its snowballing popularity. Just as people in society believe in the value of diamonds because others believe in it, Bitcoin shares this artificial value. Bitcoin was the first scarce digital asset ever created. Societies have always based the price of a currency on this concept of scarcity, which is why precious metals have been the pillar of many economies for centuries. Bitcoin supply had low inflation built in from day one. To ensure that the issuing of bitcoin would eventually cease completely, its creator Satoshi Nakamoto encoded a way to halve bitcoin’s mining reward roughly every four years; the bitcoin supply will thereby never exceed 21 million coins. But what is driving that faith? And what is underpinning the huge increases in the value of cryptocurrencies? This is more to do with its ability to store worth relative to other asset AIAWORLDWIDE.COM | ISSUE 120

Money is only a credit that a currency’s user gives to the issuer. For a currency to prosper, belief and confidence is the most important factor for its success. classes. Widespread social adoption, together with their privacy, security and transferability, make cryptocurrencies an significant asset class to store values. Cryptocurrencies do not follow the same rules as fiat currencies, or even secured assets; instead, matters tend to get complicated. Given that a cryptocurrency does not generate or support cashflow, it needs to be valued against potential and – critically – future prices. That then opens the door to several different valuation methods. And guess what – our old friend gold is back. Amongst the differing valuation models now available – the stock-to-flow method, institutional participation method and high-networth participation method – we find the gold valuation method.

The need for regulation

But let’s not forget this is a new asset class, so we would expect that investors will consider a range of valuation methodologies to estimate future value. This is, however, not risk free. It is a new asset class, and one that does not exist physically. It is not gold, as we have repeatedly said. Risks do exist and they are well known, and some would argue, substantial. We are therefore firm believers that the financial industry needs to address – and support –government initiatives around regulation. The key questions remain: Should institutional investors dive in? And is this in fact a dedicated new asset class? El Salvador became the first country in the world to adopt Bitcoin as its national currency, allowing people to use a digital wallet to pay for everyday goods. Many countries are considering issuing their own central bank digital currencies. All these developments tell of cryptocurrencies’ future potential in line with an asset class. The primary reason why some do not regard cryptocurrency as an asset class is because of its unclear regulatory environment and high volatility. However, more and more institutional investors use cryptocurrencies to hedge against inflation and currency debasement, and to diversify their portfolios in the pursuit of higher risk-adjusted returns. This is, without doubt, a new asset class and one that will increasingly gain acceptance and the participation of institutional investors as time goes on. ●

Author bio

William Je is CEO of Hamilton Investment Management Limited, a global fund manager with multi-billion assets under management.

Events UPCOMING WEBINARS

Cryptocurrencies (Malaysia) 13 January 2022 Time: 18.00 – 19.00 (Malaysia time) Speaker: Professor Ts Dr Saravanan Muthaiyah FinTech has indeed become a major disruptor for the accounting and finance sector. Technologies with embedded digitisation and digitalisation at its core are proving to be adding greater value to the profession. This session brings to you real world literacy on emerging FinTech platforms, such as the blockchain and crypto assets. The aspects of the technology and practical use cases will be discussed with real world examples to enhance knowledge of participants. This session will also emphasise the knowledge of structure, functionality and underlying technologies that concurrently make this relevant for the digital economy. Participants will also be able to evaluate benefits, potential risks and value of the technology. How both patent box and R&D can help with financial growth 25 January 2021 10.30 – 11.30 Speaker: Ian Cruickshank The webinar will examine how both patent box and R&D tax credits can help with financial growth and increased value of the company’s IP. Areas covered will be: ● qualifying activity for R&D tax credits;

● the effect on grants to an R&D claim; ● what does an HMRC enquiry entail and what are the procedures; and ● when and when not to elect into patent box. By covering these areas, this will give delegates a clear understanding of what qualifies for both schemes and also dispel some myths that have been circulating in recent months.

CPD ON DEMAND Have you missed out on AIA’s recent CPD Webinars? Our on demand content is delivered by industry experts and leading professionals, giving you the flexibility to learn and develop your skills where and when suits you best. Each webinar is worth one verifiable CPD unit and can be purchased through

Tax changes 2022 17 March 2022 10.30 – 11.30 Speaker: Aiden Corcoran Join guest speaker Aiden Corcoran from AIA strategic partner GoSimple Tax for a session providing members with an overview on the tax changes to be aware of for the new tax year. During the webinar, Aiden will cover: ● key changes and initiatives for 2022; ● digital recording and planning; ● overview of GoSimpleTax; and ● open Q&A Session

the AIA shop. The following content is available now: ● The secrets to a successful funding application; ● Audit Development – Ireland; ● Risk management; ● How to be an ethical accountant; ● Intellectual property;

Visit www.aiaworldwide.com/events for more information and registration

● MTD for income tax; ● Irish Budget 2022; ● IFRS – current key issues; ● How the accounting profession has changed in the last 12 months; and ● How to guide your clients through uncertain times. Login to your AIA online account and choose “Shop” from the My AIA menu.

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ISSUE 120 | AIAWORLDWIDE.COM

Technical INTERNATIONAL

New platform from IFAC offers digital access to international accounting standards eIS The International Federation of Accountants (IFAC) unveiled a new online resource providing unprecedented access to the international standards that support and distinguish the accountancy profession. eIS, short for e-International Standards, provides direct access to the standards developed by the International Audit and Assurance Standards Board (IAASB), the International Ethics Standards Board for Accountants (IESBA) and the International Public Sector Accounting Standards Board (IPSASB), alongside key support, reference and guidance materials, available to contextualise the language and provide enhanced transparency.

INTERNATIONAL Global standards to be set for investor-focused sustainability disclosure The International Federation of Accountants (IFAC) welcomes the establishment of the International Sustainability Standards Board (ISSB) working in close cooperation with the International Accounting Standards Board (IASB), under the governance structure and leadership of the IFRS Foundation. IFAC congratulates the IFRS Foundation Trustees for moving with unprecedented speed to meet the needs of investors, provide a holistic view of enterprise value and address the climate crisis. Climate and other sustainability issues are global in nature and the ISSB will deliver a global solution for sustainability disclosure. The multi-jurisdictional footprint of the ISSB reflects this realty and can hopefully facilitate implementation of the ISSB’s standards. IFAC also welcomes commitments to combine the CDSB and Value Reporting Foundation with the IFRS Foundation – providing much needed AIAWORLDWIDE.COM | ISSUE 120

“Rooted in our commitment to the public interest, this platform responds to stakeholder needs by making international standards and their accompanying resources accessible and easy to use,” said Kevin Dancey, CEO of IFAC. “As we continue to focus on modern approaches and the use of technology to enhance our profession, the development of eIS was a natural next step in supporting our members around the world, and the 3.5 million professional accountants they represent.” IFAC worked together with the standard-setting boards to develop a better way to access the standards. Through surveys and conversations with key

consolidation and contributing support and resources toward the success of the new ISSB. This positions the ISSB to build upon the high quality work of existing sustainability related initiatives and harmonise the standardsetting landscape – delivering a comprehensive global baseline of sustainability information material to enterprise value, connected to financial reporting through the fundamental concepts and guiding principles of integrated reporting. “Now is the time for policymakers around the world to focus on how to capitalise on the forthcoming work of the ISSB,” said IFAC CEO Kevin Dancey. “As with the success of IFRS Standards for financial reporting, IOSCO’s support is key. Jurisdictions around the world need to take the next step – deciding to use, implement and enforce IFRS Sustainability Disclosure Standards as part of a building blocks approach that will deliver the global baseline for sustainability related reporting needed for investors and capital markets.” This approach enables the global standards set by the ISSB – compatible with any multistakeholder focused disclosures that some

stakeholders, IFAC identified the key elements required to deliver a modern platform allowing the profession easier access to international standards, while providing enhanced functionality in how the standards are used. eIS features include: ● a responsive design that can be used on mobile, tablet and desktop; ● advanced and intuitive search capabilities; ● easy access to related resources; ● easy pop-up access to references; ● version control functionality; and ● easy-to-navigate pages with multiple viewing modes.

jurisdictions may require – to result in consistent, comparable and assurable sustainability related information that enhances corporate reporting. Read more about IFAC’s support for global sustainability related standards on the IFAC website.

International Sustainability Standards Board announced at COP26 As world leaders meet in Glasgow for COP26, the UN global summit to address the critical and urgent issue of climate change, the IFRS Foundation Trustees announced three significant developments to provide the global financial markets with high quality disclosures on climate and other sustainability issues: ● the formation of a new International Sustainability Standards Board (ISSB) to develop – in the public interest – a comprehensive global baseline of high quality sustainability disclosure standards to meet investors’ information needs; ● a commitment by leading investor focused sustainability disclosure organisations to consolidate into the new board.

Technical The IFRS Foundation will complete consolidation of the Climate Disclosure Standards Board (CDSB – an initiative of CDP) and the Value Reporting Foundation (VRF – which houses the Integrated Reporting Framework and the SASB Standards) by June 2022; and ● the publication of prototype climate and general disclosure requirements developed by the Technical Readiness Working Group (TRWG), a group formed by the IFRS Foundation Trustees to undertake preparatory work for the ISSB. These prototypes are the result of six months of joint work by representatives of the CDSB, the International Accounting Standards Board (IASB), the Financial Stability Board’s Task Force on Climaterelated Financial Disclosures (TCFD), the VRF and the World Economic Forum, supported by the International Organisation of Securities Commissions (IOSCO) and its Technical Expert Group of securities regulators. The TRWG has consolidated key aspects of these organisations’ content into an enhanced, unified set of recommendations for consideration by the ISSB. Together, these developments create the necessary institutional arrangements, set out in the Foundation’s revised Constitution, and lay the technical groundwork for a global sustainability disclosure standard setter for the financial markets. They fulfil the growing and urgent demand for streamlining and formalising corporate sustainability disclosures. The ISSB will sit alongside and work in close cooperation with the IASB, ensuring connectivity and compatibility between IFRS Accounting Standards and the ISSB’s standards – IFRS Sustainability Disclosure Standards. To ensure public interest legitimacy, both boards will be overseen by the Trustees, who are in turn accountable to a Monitoring Board of capital market authorities responsible for corporate reporting in their jurisdictions. The ISSB and the IASB will be independent, and their standards will complement each other to provide comprehensive information to investors and other providers of capital.

UK AND IRELAND FRC publishes latest major local audit quality inspection results The Financial Reporting Council (FRC) has published its inspection findings into the quality of major local body audits in England (which includes large health and local government bodies) for the financial year ended 31 March 2020. The FRC reviewed 20 major local audits performed by six of the largest audit firms and found that six (30%) required improvements. This is an improvement on the prior year’s inspection results, where 60% of audits inspected required either improvements or significant improvements. It is encouraging that the firms have taken action in response to previous findings; however, the timeliness of auditor reporting is disappointing. The FRC had to replace half of the local government audits initially selected for inspection (including higher risk audits) because the audits had not been finalised and signed. The key areas requiring action by some of the audit firms include: ● strengthening the audit testing of expenditure; ● improving the evaluation and challenge of assumptions used in concluding over investment property valuations; ● improving the evaluation of assumptions used in property, plant and equipment valuations; and ● providing improved rationale supporting a modified audit opinion. The FRC was pleased to note that all Value for Money arrangement conclusions inspected by the FRC required no more than limited improvements. The FRC’s Executive Director of Supervision, Sarah Rapson said: “High quality audit of local government and other public bodies is an important public interest function, providing an independent view of local body financial statements and the arrangements in place to secure value for money. “While it is encouraging to note the firms’ responses to previous year’s findings, it is clear significant

progress is still required to ensure high quality audit is being delivered on a consistent basis. “We expect the firms to build on this progress and swiftly address any deficiencies identified.”

FRC staff factsheet: Climaterelated matters The FRC has published a new FRC staff factsheet, “Climate-related matters”, part of a series that accompanies FRS 102 The Financial Reporting Standard applicable in the UK and Republic of Ireland. Demand from stakeholders continues to increase the focus on how environmental, social and governance (ESG) matters can affect companies’ financial position and performance, and the associated risks that they face. This increased focus has led to legislation and guidance on the content of the narrative sections of the annual report, such as requiring disclosure of greenhouse gas emissions or providing information about emissions reduction strategies. Less attention has been paid to the financial statements themselves. The Financial Reporting Council (FRC) has helped to drive improved reporting in this area with recent publications including the Climate Thematic and the ESG Statement of Intent. These publications emphasised that preparers need to consider the impact of climate-related matters on the financial statements, as well as on the narrative reporting. This staff factsheet is a response to the commitments made in these publications to issue such guidance. A link to the factsheet is available on the FRC website.

Preparing for mandatory TCFD reporting, including disclosures of scenario analysis This year, premium listed companies will need to report against the Taskforce on Climate-related Financial Disclosures (TCFD) recommendations on a comply or explain basis in their annual reports with other companies following in the future. The Financial Reporting Lab has published a report in advance of these requirements to help companies prepare for mandatory TCFD reporting. It includes practical advice ISSUE 120 | AIAWORLDWIDE.COM

Technical and examples that better address aspects of TCFD reporting from those companies already adopting the framework on a voluntary basis. Alongside the report, the Lab has also published a snapshot of the status of current reporting against the TCFD framework in the UK, which highlights the increased uptake in the last year. One of the biggest challenges for companies adopting the TCFD framework is carrying out scenario analysis. In addition to the Lab’s reports, the FRC has also published research by the Alliance Manchester Business School, which investigates climate-related scenario analysis in more detail. The research highlights the various approaches companies have adopted, instances of good practice, typical challenges faced, and the common steps taken to conduct the analysis. Phil Fitz-Gerald, Director of the Financial Reporting Lab said: “It is good to see that many more companies have adopted the Taskforce on Climate-related Financial Disclosures framework over the last year but further development is needed to meet user expectations. As mandatory reporting requirements come into place for premium listed companies at the end of the year, the Lab’s report and the research carried out by the Alliance Manchester Business School provide practical advice to companies on how to meet expectations of climate-related reporting under the TCFD framework.” Dr Yasmine Chahed, Visiting Research Fellow at Alliance Manchester Business School (AMBS), said: “Efforts to limit global warming vary across the world’s nations. COP26 is just around the corner and represents an effort to limit global warming to 1.5 degrees, but businesses have to prepare for many possible outcomes and eventualities. “That’s why projects like this are so important in helping to shape future regulatory strategy – and how that’s delivered. The climate challenge is huge and scenario analysis is critical in tackling this issue, and in facilitating the transition to a greener economy. “Our research hammers these points home and indicates that many businesses are uncertain of the effects of climate change on their organisation. It’s clear, then, that mapping out those uncertainties now will put businesses in a better position to overcome the obstacles that lie ahead.” AIAWORLDWIDE.COM | ISSUE 120

FRC review of IAS 37 ‘Provisions, Contingent Liabilities and Contingent Assets’ The Financial Reporting Council (FRC) has published the findings of its review into IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, which has been identified as a recurrent problem area by the FRC. Provisions and contingent liabilities reporting is of particular importance to investors, owing to the forward looking information it can provide about a company’s exposures. The issues giving rise to provisions and contingent liabilities are often long term in nature, such as climate change and other environmental obligations, or significant to the assessment of future business performance, for example, onerous contracts and regulatory penalties or compensation. The FRC’s review considered how a sample of 20 companies’ annual reports had met relevant reporting requirements, identified examples of good practice and outlined its expectations for future disclosures. The review found scope for improvements in several areas, in particular: ● explaining how the amounts of expected outflows have been estimated, identifying the key assumptions applied and describing the associated uncertainties; ● disclosing the phasing of outflows companies expect to see as they utilise their provisions; and ● describing the underlying costs for which companies make provisions. The FRC also encourages companies to disclose entity-specific accounting policies and to provide more quantitative information about contingent liabilities. The FRC’s Corporate Reporting Review Director, Carol Page, said: “The reporting of provisions and contingent liabilities is of particular importance to investors and other users of accounts in understanding the longer-term financial effects of climate change and other risks to companies’ prospects. “Companies should carefully consider the findings of our review and take appropriate steps to improve their reporting, consistent with our expectations.”

EUROPE European Single Electronic Format update Earlier this year, it was announced that the requirements of the European Single Electronic Format (ESEF) Regulation would be postponed for one year as part of the EU Capital Markets Recovery Package. In light of this delay, under the EU Transparency Directive and ESEF Regulation, annual financial reports of issuers which have securities admitted to trading on an EU regulated market must be prepared in accordance with the requirements of the ESEF for financial years beginning on or after 1 January 2021. In advance of December 2021 year end, we remind relevant issuers that your 2021 statutory financial statements must be prepared in accordance with the requirements of ESEF. It is important that relevant entities consider the impact of these requirements on reporting timelines and engage with auditors early in this regard also.

ASIA PACIFIC Summary of responses to public consultation on the Draft Corporate Registers (Miscellaneous Amendments) Bill 2021 The Ministry of Finance (MOF) and the Accounting and Corporate Regulatory Authority (ACRA) invited the public to provide feedback on the draft Corporate Registers (Miscellaneous Amendments) Bill 2021 (the Bill) from 2 to 30 July 2021. The proposed amendments in the Corporate Registers (Miscellaneous Amendments) Bill 2021 aim to enhance Singapore’s regime on the transparency and beneficial ownership of companies and limited liability partnerships (LLPs). These amendments serve to reduce any opportunities for the misuse of corporate entities for illicit purposes and are in line with international standards set by the Financial Action Task Force for combating money laundering, terrorism financing and other threats to the integrity of the international financial system. The proposed legislative amendments in the public consultation are as follows:

Technical a. Specify a 14 day time frame for foreign companies to update their register of members. b. Require local companies, foreign companies and limited liability partnerships (LLPs) to enter the particulars of the individual(s) with executive control in their registers of controllers if no individual or legal entity having significant interest in or significant control over the company or LLP has been identified. c. Clarify that local companies should update their register of nominee directors within seven days after receiving information from the directors. d. Require local and foreign companies to keep non-public registers of nominee shareholders. The key feedback received in response to the amendments, and our responses to the feedback, are available on the website. ACRA will address the clarifications sought in the feedback by publishing guidance on compliance when the legislative amendments are implemented. Feedback received on areas not under the scope of the Bill may be considered by MOF and ACRA in a future review. The proposed legislative amendments in the Corporate Registers (Miscellaneous Amendments) Bill 2021 will be presented in Parliament in November 2021. MOF and ACRA would like to thank all respondents who have provided their feedback in this public consultation.

UNITED STATES FASB improves discount rate guidance for lessees that are not public business entities The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) that improves discount rate guidance for lessees that are not public business entities – including private companies, notfor-profit organisations, and employee benefit plans. The amendments in the ASU should reduce the cost of implementing the lease standard (Topic 842) for those entities while retaining the expected benefits for users of financial statements. Topic 842 currently provides lessees that are not public business entities with a practical expedient that allows them

to make an accounting policy election to use a risk-free rate as the discount rate for all leases. The FASB originally provided this practical expedient to relieve those lessees from the cost and complexity of having to calculate an incremental borrowing rate. Some private company stakeholders expressed reluctance to use the riskfree rate election for all leases. Those stakeholders noted that a risk-free rate (for example, a U.S. Treasury rate) is low compared with their expected average incremental borrowing rates, and that using the risk-free rate election could increase an entity’s lease liabilities and right-of-use assets. To address these concerns, the amendments in the ASU allow lessees that are not public business entities to make the risk-free rate election by class of underlying asset, rather than at the entity-wide level. It also requires that, when the rate implicit in the lease is readily determinable for any individual lease, a lessee use that rate (rather than a risk-free rate or an incremental borrowing rate), regardless of whether it has made the risk-free rate election. The ASU is available at: www.fasb.org.

FASB proposes changes to interim disclosure requirements The Financial Accounting Standards Board (FASB) has issued a proposed Accounting Standards Update (ASU) that would modify the disclosure requirements for interim financial reporting. Stakeholders are encouraged to review and provide comment on the proposal by 31 January 2022. The proposed ASU is part of the FASB’s disclosure framework project to improve the effectiveness of disclosures in the notes to financial statements. It would update FASB Accounting Standards Codification Topic 270, Interim Reporting, which clarifies the application of accounting principles and reporting practices for entities preparing interim financial statements and notes in accordance with Generally Accepted Accounting Principles (GAAP). The amendments to Topic 270 would apply to all entities that provide interim financial statements and notes in accordance with GAAP. Broadly, the proposed ASU would make the following modifications.

1. Disclosure at interim periods

The proposed ASU would incorporate

a requirement that was previously included in SEC Regulation S-X that requires disclosure at interim periods when a significant event or transaction has occurred since the prior year-end that has a material effect on an entity. The US Securities and Exchange Commission (SEC) removed language from Regulation S-X, Rule 10-01, Interim Financial Statements, with the 2018 issuance of SEC Release No. 33-10532, Disclosure Update and Simplification. The amendments in this proposed ASU would add a new principle, based on the removed portion of Regulation S-X, which would be applicable to all entities that provide interim financial statements and notes in accordance with GAAP. The proposed ASU also states that the resulting disclosures may be transaction or event specific.

2. Presentation and disclosure

The ASU would clarify the presentation and disclosure alternatives for interim financial statements and notes in accordance with GAAP. It would clarify that the following three forms of financial statements and notes are in accordance with GAAP: a. financial statements prepared with the same level of detail as the previous annual statements subject to all the presentation and disclosure requirements in GAAP; b. financial statements prepared with the same level of detail as the previous annual statements subject to all the presentation requirements in GAAP and limited notes subject to the disclosure requirements in Topic 270; and c. condensed financial statements and limited notes subject to the disclosure requirements in Topic 270.

3. Feedback from stakeholders

The proposed ASU would address feedback from stakeholders who requested that interim reporting requirements be clarified and consolidated into one Topic of the Codification. Certain amendments in the proposed ASU would respond to stakeholders’ desire for interim reporting requirements to be clarified and consolidated into one Topic of the Codification. Finally, the proposed ASU includes amendments to clarify when comparative disclosures are required. The proposed ASU is available at www.fasb.org. ISSUE 120 | AIAWORLDWIDE.COM