Dispatch (UK/ROW version)
| by Paul Gosling 03 Jun 2006 Topic: News |
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UK Government proposals to introduce a statutory requirement for listed companies to publish an Operating and Financial Review (OFR) have been abandoned, it was confirmed when amendments to the Company Law Reform Bill were published. Quoted companies will, though, be required to publish Business Reviews in compliance with European law indicating the main trends and factors likely to affect the future development, performance and position of the company’s business together with information regarding environmental impact, employees and social and community relationships. Auditors will be required to report on the consistency of the Directors’ Report with the annual accounts, but with no additional requirement to check for other inconsistencies. Companies will be exempt from disclosing in the Business Review information which is seriously prejudicial to their interests. There will be no statutory reporting standards for the Business Review. ACCA’s chief executive, Allen Blewitt, strongly criticised the move, describing the Business Review as “a decidedly inferior reporting tool”. Debate on the OFR has now shifted to what should be required of companies under the Financial Reporting Council’s Combined Code and the International Accounting Standard Board’s (IASB) Management Commentary. Richard Martin, ACCA’s head of financial reporting, said: “Management Commentary of the type proposed by IASB should be produced by all public interest entities to supplement the financial statements. Companies should consider wider performance measures and longer-term risks and consider carefully the level of corporate social responsibility that is both necessary and appropriate to them.” He added that the Management Commentary, once adopted by the IASB, could replace the current narrative reporting regimes in many countries, including the Management Discussion and Analysis used in North America. In the UK, following the Government’s decision to scrap the OFR, the use of Management Commentaries would represent little change. The current best practice Reporting Statement on the OFR is very similar to these IASB proposals. The amended Company Law Reform Bill also, as expected, includes provisions to potentially protect audit firms from massive negligence claims. Detail of the provisions remain to be finalised by Parliament. fraud reduces export to fiction So-called carousel fraud has become so large that the UK’s Office of National Statistics (ONS) has admitted that figures on the country’s trade deficit can no longer be relied upon. The fraud, also called Missing Trader Fraud, is conducted by criminals pretending to be legitimate businesses and registering for VAT. Using a VAT registration number, a rogue trader can import goods free of VAT, sell the goods inclusive of VAT, but disappear without passing on the collected tax to the authorities. Lightweight electrical goods, such as computer chips and mobile phones, which can be imported without paying much in distribution costs, are favourite products for the transactions. “Following a change in the pattern of trading associated with Missing Trader Intra-Community (MITC) fraud, identified by HM Revenue & Customs (HMRC), interpretation of the breakdown between EU and non-EU trade is more difficult,” reported ONS. “The deficit with EU countries in March was £2.9bn compared with £3.7bn in February. The deficit with non-EU countries in March was £2.6bn compared with £3.3bn in February.” MITC frauds have the effect of inflating both import and export figures. Exports to EU countries in the first quarter of this year rose by 12.5%, with imports from EU countries increasing by 11%. This trend is particularly noticeable in commodity groups, with exports of finished manufactured groups rising by 23% and imports increasing by 20%. Some analysts suggest that the scale of MITC may be equivalent to about 10% of total UK exports and imports, or £5bn in the current year. The most recent figures from HMRC estimate the value of the frauds at between £1.1bn and £1.9bn, but HMRC accepts that the scale of the fraud has risen threefold in the last two years and is continuing to increase rapidly. bank told to disclose accounts Billions of pounds of unpaid tax could be collected as a result of decisions by the Special Commissioners requiring banks to hand over details of customers’ offshore accounts. HM Revenue & Customs (HMRC) expects to raise £1.5bn in revenues from clients of Barclays Bank alone. In forming his decision regarding Barclays Bank, the Special Commissioner, John Avery Jones, pointed out that the number of UK residents with Barclays’ offshore accounts exceeded the total number of UK residents who have completed the foreign-income pages of their tax returns. “Far from being a fishing expedition, it seems probably that 76% of cases will raise questions… [and these account holders are]… likely to be in default in complying with tax obligations,” he concluded. Arguments that the disclosures breached individuals’ personal freedoms were rejected by the Commissioner. “Had they opened a UK bank account, the UK bank would automatically give the Revenue information about interest earned on that account every year,” he explained. He said that the requirement for disclosure was proportionate and justified, based on clear evidence from a sample of cases that tax payment was being evaded. A spokesman for HMRC said that it was unable to estimate the number of people who may be using offshore accounts to evade tax, and he stressed that there was no suggestion that banks were complicit in any evasion. The spokesman added that there was clear authority for the collection of information on offshore accounts. “HMRC can require banks or any third party to hand over information to them through Section 20 of the Taxes Management Act 1970. The independent Special Commissioners must give prior consent to HMRC’s request for information and, if they do so, the bank is legally obliged to hand over the information to HMRC.” About 80% of Barclays’ customers with offshore accounts make no declarations regarding foreign income on their tax returns, though some of these will have no tax liability - for example, as non-taxpaying pensioners. In accordance with the 2005 EU Savings Directive, the UK automatically receives information on accounts of UK residents, collected by the governments of all EU member states except Austria, Belgium and Luxembourg, which will operate similar systems in the near future. Various popular offshore financial centres also exchange tax-related financial information with the UK. HMRC has taken action regarding offshore accounts against other banks, with further cases awaiting hearings with the Special Commissioners. HMRC says that hundreds of thousands of UK taxpayers hold offshore accounts without declaring related income, including some in receipt of tax credits. VAT in Europe needs to be reformed, but this must be done in a way that does not disadvantage the continent in a globalised economy, the European Commissioner for taxation, László Kovács, has said. He argued that the current rules favour third-country operators in the way outsourced operations are treated. Calling some VAT provisions “outdated”, Kovács said that the Commission and member states are committed to resolving problems related to VAT as part of their move towards completion of a single market in financial services. But he added: “European financial services must function as global players, and any reform of VAT must ensure that the European tax system does not place them at any competitive disadvantage.” He recognised that there was resistance to reforming VAT. “Without reform, however, overall economic developments and enforced changes brought about by the [European] Court of Justice (ECJ) will also pose a threat to state revenues. It is clear that it will not be possible to maintain total budgetary neutrality if a viable solution to the VAT problems is to be found. However, keeping and further developing a vibrant financial services industry in the EU should be worth limited VAT revenue trade-offs that will be compensated by increases in other taxes and contributions.” Peter Vipond, director of financial regulation and taxation at the Association of British Insurers, welcomed the Commission’s initiative. “We are pleased that the EU Commission recognises the current VAT regime does not meet the needs of the 21st century, and we urge member states to use the review to enhance the EU’s competitiveness in a global economy,” he said. Vipond said that insurers were keen that they should not suffer additional VAT costs as a result of outsourcing insurance related activities. He argued that this had been the understood position, until recent ECJ decisions. In addition, he suggested, VAT rules should not discriminate against insurers doing business across European borders. These steps were necessary, said Vipond, to enable insurers to operate on a similar basis to other industries. Company Law Directive approved The duties of auditors and their obligations regarding independence and ethics have been strengthened by the Eighth Company Law Directive, which has been approved by the European Council. The directive amends and updates previous directives agreed in 1978 and 1984, reflecting what the European Commission describes as the increase in size and importance of audit firms. The new directive introduces separation between the statutory auditor and the audit firm, providing greater clarity in the specific requirements on lead audit partners and their firms. Audit firms will have to provide detailed public reports of audited public interest entities, including the date of the last quality assurance review, policies on continuing education requirements and audit fee details. Public interest entities will be required to have independent audit committees to strengthen the monitoring of financial reporting and the statutory audit process. Statutory auditors will be required to use international auditing standards and effective systems of quality assurance and be independent of the audited body. Dismissal of the audit firm or statutory auditor will only be possible if there is a significant reason why the statutory auditor cannot finalise the audit. All statutory auditors and audit firms will be identified in an electronic public register, declaring membership of networks and firms’ management and ownership structures. Member states must have effective systems of investigation and sanctions over auditors. The European Federation of Accountants (FEE) welcomed the new rules. David Devlin, FEE’s President, said: “FEE particularly welcomes the proposals on key issues such as application of international standards on auditing, quality assurance and new arrangements for public oversight of the profession. These reforms are a clear commitment by the EU to underpin investor confidence in Europe and will drive the further harmonisation of audit practice.” EU member states have two years to implement the directive into national law. confusion over tax liability for subsidiaries The UK and other EU member states can levy taxes on controlled foreign companies (CFCs), where those companies establish overseas subsidiaries purely to avoid tax, the European Court of Justice’s (ECJ) Advocate-General has concluded in a non-binding opinion on the Cadbury Schweppes case. Cadbury Schweppes incorporated two subsidiaries in Dublin to enable intra-group lending treasury activities to benefit from the Irish tax rate of 10%. But the UK tax authorities claimed additional corporation tax relating to those activities of £8.6m. The Advocate-General - who provides advice to the ECJ - concluded that it is not necessarily an abuse of freedom of establishment for a parent company to incorporate a subsidiary in another member state to take advantage of a more favourable tax regime. He added that UK tax law differentiates its treatment of groups with subsidiaries in the UK compared with those in other member states, with the intention of deterring a resident company from establishing a subsidiary in a lower-tax member state. But the Advocate-General noted that counteracting tax avoidance is a public interest justification to override a fundamental freedom. However, that hindrance of a freedom should relate to legislation that specifically excludes from a tax advantage wholly artificial arrangements intended to circumvent national law. It is a matter for UK courts to determine whether the national legislation limits the use of artificial arrangements to circumvent UK tax liabilities. In determining whether arrangements are artificial, the Advocate-General suggested using three tests: the degree of physical presence of the subsidiary in its host state; the genuine nature of the activity provided; and the economic value of that activity to the parent company. Guy Brannan, global head of tax at lawyers Linklaters, said that the advice leaves a lot of uncertainty, with many companies potentially failing the test for exemption from the CFC rules. However, Chris Morgan, head of the EU Law Group at KPMG, said: “[This] opinion could well represent a rare ‘win-win’ situation for both revenue authorities and taxpayers. At the heart of the controversy over these CFC rules was the fact that they were very widely drawn and often apply to purely commercial structures. What we see [in the opinion] is a definition of artificiality which will be enormously helpful for companies determining where they stand.” The decision of the ECJ is expected at the end of the year. In brief...
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