Dispatch

• OFR-course
• Europe considers tax harmony
• BCCI case collapse
• pensions confusion

OFR-course

In a move which has shocked and disappointed the profession and investors, the UK Government has yielded to pressure from some major companies by abandoning plans to introduce the statutory Operating and Financial Review.

Announcing the move, Chancellor Gordon Brown told the Confederation of British Industry that the OFR was an example of UK goldplating of European legislation - which went further than was necessary and, in doing so, increased the regulatory burden on British companies. He said: “To emphasise our commitment to this new approach the Government is today abolishing a specific example of goldplating. Best practice is of course for companies to report on social and environmental strategies relevant to their business. But I understand the concerns about the extra administrative cost of the goldplated regulatory requirement that, from April next year, all quoted companies must publish an operating and financial review. So we will abolish this requirement and reduce the burdens placed upon you - the first of a series of regulatory requirements which, by working together, we can abolish in the interests of the British economy.”

Investors are irritated at the abandonment of a system which they had expected would lead to more transparent reporting, enabling higher quality analysis of companies and improved investment decisions. Lucy Butler, spokeswoman for the Association of British Insurers, said: “It is a matter of considerable regret that so much effort and energy has been wasted on this, including the creation of an accounting standard. It is also peculiar that a government anxious to promote shareholder engagement has created expectations of better reporting and communication by companies, only to undercut them at the last minute and without consultation.

“We have seen the OFR as an opportunity for boards to lay out material issues in a way that improves the understanding of shareholders of a company’s approach to longer term issues and, thereby, create a framework for improving the quality of shareholder engagement. This is a good antidote to short termism, and we were happy with the compromise reached between the Department of Trade and Industry and all consultees on a light touch regulatory approach. Many companies already produce an OFR on a voluntary basis and most large companies also take account of the ABI’s reporting guidelines on risk management and corporate responsibility. We believe it is important that this trend continues. We need to develop best practice and it might be worth considering the scope for some reference to this reporting in the Combined Code.”

ACCA endorsed this sense of disappointment. John Davies, ACCA’s head of business law, said: “The OFR concept has been developing as an optional feature of UK financial reporting since the early 1990s, but its conversion to a statutory footing earlier this year had been seen as an integral feature of the new corporate reporting framework being brought in under the planned new companies legislation. We query what has caused the Government to change its mind so dramatically on the OFR, particularly since provisions dealing with the new statement appeared in the long-awaited company law reform Bill [published in November].”

Davies pointed out that, only months previously, Trade Minister, Jacqui Smith, had rejected suggestions that the OFR would increase the regulatory burden on business. She had told Parliament: “We carefully considered what stakeholders told us during consultation, and announced several changes to the draft regulations last November. Those changes have strengthened our proposals, reduced the burdens for companies and enhanced the usefulness of the OFR for shareholders and other stakeholders.”

Davies explained: “Our view is that the new model has attracted broad support from the business community as a vehicle for a more broadly-based reporting function. From our contacts with companies and investors, our understanding is that both groups have reacted positively to the introduction of the OFR. Though there have been concerns with certain aspects of it, most have adopted a constructive approach to it, as opposed to seeing it as an exercise in pointless red tape.

“ACCA agrees wholeheartedly with the goal of reducing red tape, but we also believe that the OFR has the potential to become a very useful tool for stakeholder engagement. To abandon it at such a late stage, and before it even had the opportunity to prove its worth, calls for a full explanation from the Government.”

Nigel Youell, head of financial applications marketing at accounting software supplier Hyperion, predicted the move would have little impact in terms of cutting reporting requirements. He said that 12,000 companies in the UK were affected by the EU Accounts Modernisation Directive, in providing more comprehensive reporting, compared with the just 1,200 quoted companies that would have been required to produce OFRs. “The fact is, with or without the OFR, most of the original requirements remain in place,” he said.

Europe considers tax harmony

Europe’s Tax Commissioner, Laszlo Kovacs, is preparing plans for harmonisation of corporation tax rules across the European Union. However, the move is likely to provoke fierce resistance both from some member states and other commissioners, with Internal Market Commissioner Charlie McCreevy suggesting implementation of unified tax systems could take more than a lifetime.

Speaking at a conference in Hong Kong, Kovacs said: “In the field of direct taxation, one of the major obstacles for companies operating in more than one member state is the fact that in the 25 countries there are 25 different methods of calculating the corporate tax base. It results in major administrative burdens, in huge compliance costs, in lack of transparency. Consequently, it obviously has a negative impact on the competitiveness of business in the EU.

“In order to cope with this problem, we have started to work on a proposal to introduce a common consolidated corporate tax base, which is one of my main projects. The business community is strongly supportive for obvious reasons and the overwhelming majority of the EU member states show a great deal of openness. It is a medium term priority and we have a long way to go.”

Kovacs added that he also wanted to introduce measures to simplify VAT regulations, making compliance easier for companies operating cross-border. In addition, he wanted an agreed common system for car registration tax.

A spokeswoman for the European Commission said that it was intended that an agreed common consolidated corporate tax base for companies’ EU-wide activities would be in place by 2008, by which time Community legislation should be approved. “A Common Consolidated Corporate Tax Base would permit cross-border offsetting of losses and would solve the current tax problems linked to cross-border activities and restructuring of groups of companies,” she said.

However, the spokeswoman stressed that this did not involve the creation of a common tax rate. But several member states are now keen to see exactly this, following the success of flat taxes in some of the new member states, along with a low corporation tax rate in Ireland, in attracting foreign direct investment at the expense of member states with higher corporation tax rates. Reports suggest that the UK, Ireland, the Czech Republic, Slovakia and Estonia are all opposed to harmonisation of rates, but that the other 20 member states are supportive.

Estonia charges zero rate reinvested corporation tax; in Ireland the general rate is 12.5% (having been 10% for manufacturers); in Latvia and Lithuania it is 15%, and in Romania, Hungary, Poland and Slovakia they are between 16% and 19%. Elsewhere - particularly in the unemployment hot spots which used to be Europe’s industrial heartlands - rates are much higher. In Germany corporation tax is 25% (after a recent large cut) and it is 35% in France and Italy.

The level of opposition to an imposed common rate can be judged from initial reactions in Ireland. A report from a government advisory body, the National Competitiveness Council - published days after it was reported that Europe’s tax commissioner was pushing for tax harmonisation - argued that raising corporation tax rates would reduce overseas investment, employment levels and, ultimately, total tax take.

But the risks to advanced economies posed by international tax competition can be judged by recent developments in the Channel Islands. Jersey has agreed to introduce a zero rate for corporation tax from 2008 - which Guernsey is expected to copy - and is moving towards an income tax flat rate of 20%, under the slogan of “20% means 20%”. Jersey’s Government argues that the measures are essential to protect it from downward international tax competition, despite it also requiring lower public expenditure.

But two of the Big Four firms have warned that tax competition could apply not just on headline rates, but also to governments’ attitudes to tax avoidance and collection. PricewaterhouseCoopers has said that the UK Chancellor’s tough line on avoidance and collection could drive some international companies to other locations. In another warning, Loughlin Hickey, global head of tax at KPMG, urged the establishment of greater trust between tax authorities and tax advisers, otherwise the actual “tax gap” would widen just when the Treasury was trying to close it, he said.

BCCI case collapse

Deloitte & Touche, in its role as liquidator of the Bank of Credit and Commerce International (BCCI), is facing a legal claim from the Bank of England “for the largest possible compensation for its costs”. This follows the collapse of the case against the Bank for its role in the world’s biggest banking collapse, when BCCI folded in 1991. The Bank of England is likely to claim in excess of £70m for legal costs and loss of interest. The case has already cost the liquidators more than £30m to pursue.

Deloitte dropped its claim that the Bank of England had acted dishonestly in forcing the closure of BCCI. Responding to the collapse of the case - the most expensive in English legal history - governor of the Bank of England, Mervyn King, said: “I am delighted that the allegations of dishonesty against 22 staff of the Bank of England have been unconditionally withdrawn. There has never been a shred of evidence to support these disgraceful allegations, and the case has collapsed as we always expected it would. The judge himself said that the allegations against all 22 Bank staff were ‘wholly without foundation’. The foolish determination to pursue a hopeless case for so long has also led to a huge waste of creditors’ and taxpayers’ money, and I hope everyone concerned will take a close look at how and why such a very weak case took 12 years to come to an end. The Bank will be seeking the largest possible compensation for its costs.”

Former employees of BCCI, acting as the BCCI Campaign Committee, are now calling for the UK Government or Parliament to conduct an investigation into Deloitte’s conduct, claiming that the legal action against the Bank of England was never likely to be successful and should not have been brought. The committee has previously criticised the level of fees charged by Deloitte, which it said had reduced significantly the amount of money available for distribution to BCCI creditors.

The Bank of England has requested that the judge, Mr Justice Tomlinson, produce a written judgement including comments on Deloitte’s conduct. The Bank’s QC, Nicholas Stadlen, said that Deloitte’s response to its loss of the case was “the longest whinge in litigation history following short on the heels of the most humiliating climbdown in litigation history”.

BCCI liquidators issued their own statement, saying that an important factor in their decision to abandon the case had been their success in obtaining assets from BCCI’s creditors. They argued: “When this litigation began in 1993... the liquidators envisaged dividends of the order of 10%. By comparison, by December [2005] they will have paid dividends totalling 81%.”

The liquidators added: “The Bank has invested a very substantial amount of money in its defence and this has increased the costs required to be spent by the liquidators. The Bank’s own costs have been running at approximately double the level of the liquidators’ costs. The case has continued far longer than anticipated, with far greater costs than expected, and it could continue for several years to come. The Bank has made it very clear that normal commercial considerations do not apply to this issue and it will not negotiate.”

A spokeswoman for the Bank of England confirmed that the Bank is strongly pursuing its case for recovery of legal costs, and a hearing is scheduled for 30 January for the court to consider this. However, the claim is against the residual assets of BCCI and any costs will not fall on Deloitte & Touche.

pensions confusion

It took three years to research and write, but Lord Turner’s review of pensions policy in the UK has not achieved the desired consensus. Rumours suggest that Chancellor Gordon Brown has rejected the basis of some of the recommendations on future public spending.

Given the complexity of pensions and challenging demographics that has produced an assumed crisis in funding pensions, it was inevitable that any proposed solution would itself be complex. And having produced a massive report, the Turner Commission cannot be accused of adopting a simplistic approach.

Key findings include raising that state pension age to 66 by 2030, to 67 by 2040 and to 68 by 2050, with future rises linked to life expectancy. State pensions should increase in value, be linked to average wages and move away from means testing. Pension entitlement should cease to be based on the number of National Insurance contributions purchased, but instead on UK residency - benefiting, in particular, women who have had time away from their careers. Over 75s should be paid a universal basic state pension and the state second pension (formerly the State Earnings Related Pensions Scheme) should also move to being flat rate.

A new National Pensions Savings Scheme would be in place by 2010, into which employers would be required to pay and which employees would automatically join if they were not members of a workplace pension scheme. Contribution rates would be 4% of employees’ pay, plus 3% from employers and 1% from the state. Workers will be free to top-up with additional contributions, and pension providers will have management fees capped at 0.3% per annum. Various measures are proposed to assist older people to stay working for longer.

But the complexity has been laced with confusion because of the contrasting way in which ministers have responded to the proposals. While the Chancellor is perceived to have hinted his opposition to the costs, both the Prime Minister and the Pensions Minister, Stephen Timms, have welcomed the report.

ACCA has been among a wide range of organisations that has responded positively to Lord Turner’s proposals. John Davies, ACCA’s head of business law, said: “This is a common-sense report which makes credible recommendations to tackle the pensions time bomb in the UK. Any attempt to remove the high degree of uncertainty affecting pensions provision in the UK - both in the private and the public sector - can only be applauded.” But Davies added that ACCA was unhappy that insufficient action was being proposed to tackle the loss of good quality occupational pension schemes, particularly final salary schemes. He said that he hoped that Work and Pensions secretary, John Hutton, would properly address this all in the pensions white paper due for publication in Spring 2006.

Irritation amongst financial advisers with the Government’s handling of pensions policy increased substantially with the Chancellor’s Pre-Budget Report, in which he announced significant changes to the previously announced intended rules for Self-Invested Personal Pensions to apply from April 2006. In particular, second homes which originally could have been held within a SIPP are to be excluded from a SIPP.

Ray Boulger, senior technical manager at John Charcol, condemned the Chancellor’s decision. “It is absolutely staggering that, at this late stage, the Government has changed its mind on what investments will be allowed in SIPPs, and the exclusion of investment in individual properties is by far the most significant change. Not only will this have a profound effect on many consumers, who have already set up a SIPP or incurred other costs, but also literally thousands of hours of professional time have been completely wasted. After helping to kill off many pension funds with a £5bn per annum tax grab in the first budget eight years ago, this is another kick in the teeth for pensions, just when the Government should be trying to encourage people to invest for their retirement.”

Jerome Melcer, actuarial director at BDO Stoy Hayward Investment Management, was similarly scathing. “Gordon Brown has made an enormous u-turn on SIPPS that has wasted thousands of hours of professional time. An entire industry has been set up to deal with property-based SIPPS and now it’s all been canned.” He added that while he condemned the timing, residential property should never have been available for holding within a SIPP.