Senior Accounting Officers: A practical guide for tax professionals Introduction Much has been written in the past few months about the new Senior Accounting Officer legislation, which has finally been enshrined in Schedule 46 of Finance Act 2009. From our discussions with in-house tax departments since the Budget, we are of the view that: Some large firms, possibly in an attempt to generate fee earning projects, have massively over stated the impact the legislation will have on in-house tax departments; Most in-house tax teams are taking a more pragmatic “wait and see” approach; In-house tax teams are perfectly capable of producing the documentation needed to prove compliance with the legislation and have probably done a lot of it already as part of the HMRC risk assessment initiative; and Most companies are already complying with the legislation and those that aren’t probably know who they are already! In this guide, we have tried to set out the steps an in-house tax team might want to go through to produce the appropriate evidence that their systems and processes meet the legislative requirements. We have detailed the use of tried, tested and recognised methods for business process documentation. We hope this helps you and goes some way to putting things into perspective. Why document the current processes? Evidence, pure and simple. You need to be able to show HMRC and other stakeholders that the processes being used in the tax department are not ad hoc and have been considered intelligently. The processes do not have to be the world’s most efficient or the most technologically advanced and indeed there is no “right answer”. However, they do need to be sufficiently robust to mean that all stakeholders can have the assurance that the figures coming out of the tax department are materially correct. As well as assisting in the SAO compliance project, you will gain other benefits from documenting your current processes: Good documentation provides clear, consistent guidelines so team members know what to do, how to do it, and when to do it; With proper documentation, you will have a record of processes followed by team members who have left, and new team members can learn the ropes more quickly and cost-effectively; Proper documentation provides continuity over time even through management and staff changes, something very relevant in the current economic climate; A documented procedure is easier to change when circumstances demand it; Adherence to documented processes can be used as an evaluation tool for rewarding and enhancing staff and department performance; and Properly defining the roles and responsibilities of team members will help ensure that work goes smoothly and efficiently. If things do go wrong, it will also be easier to track down the source of the problem.
Through the tax automation work we do with clients, we have noticed several recurring factors that can make it difficult for tax teams to document their workflow processes. Here are some of the common excuses: Tax teams often feel that processes are too creative to be defined, for example tax planning; They believe that there is too much of a human element involved in the processes; Many believe there is not enough time to document processes; and Tax staff may be concerned that defining and documenting their roles will make them replaceable. Instead, perhaps you should think about how the team may be harmed by not documenting the processes. Do you want others in the business to think that tax staff are re-inventing the process every time it is performed? Surely you can’t be that inefficient, so why not prove it? If you can’t document your processes, then they may represent real risks to your business. In motoring parlance, think of the process documentation as the “Haynes Manual” for your tax department. Top down process documentation When mentioning “top down”, many people think we only mean looking at the high level processes first and then going down into greater detail for each inter-related process. However, we mean more than this – the process documentation must be driven from the top. The Head of Tax must first develop the high level process overview and then delegate the completion of each part of the detailed picture to the member of the team responsible for that area. This is not an isolated project for one team member to work on. It is a team effort. Our approach starts with each team member spending no more than 15 minutes on documenting their job function. You’d be surprised how much you can jot down in this time and how effectively such a short, sharp time frame concentrates the mind. A 15 minute “brain dump” of everything related to the processes being documented allows the team member to get past the mental block of “where do I start” – and it's difficult for anyone to claim that they can’t devote 15 minutes to the documentation process! From that point onwards, you should find that you start to build a much clearer picture of the workings of the tax department on which to construct a more detailed analysis. What needs to be documented? Given the current SAO legislation and best practice, the minimum activities that should be documented and reviewed are: The corporate tax computation preparation process. This includes the processes used by any outsourced providers such as accountants, lawyers and consultants; The tax reporting process at year end, interims and quarter ends to provide tax provision and forecast figures; The capturing and reporting of VAT figures from initial invoice entry to VAT return; The management of PAYE through engagement of new staff, the regular reporting and payment of payroll taxes on remuneration and benefits through to termination of employment. If relevant, the tax compliance processes around IPT, SDLT, SDRT and PRT also need to be documented.
How should processes be documented? Whilst a written list of tasks and decision events will suffice, it is often more straightforward to create flowcharts to define a process. By visualising the process, a flowchart is not only more accessible to a wider audience but can quickly help identify bottlenecks and places where the process can be streamlined or improved. For example, a flowchart will allow the tax team to: Identify all the tasks within a given process; Determine the boundaries of each process; Reveal bottlenecks and redundant or duplicated steps; Allow comparison between the actual flow and an “ideal” flow; and Help train employees. It is worth considering creating a high level diagram first to identify the key items and flows of data around the department. This can then be expanded as required. An example of a high level data flow diagram covering the preparation of a tax provision and forecasts is shown below (using Gane-Sarson DFD notation):
Forecast
Actual
Tax Senior Management
Report Production
Aggregation
Group Forecast
Develop forecast figures
HQ Tax Team
Pending Actual Figures
Extract EBIT and tax lines
Ledger Finance Team
Consolidation System
Further detail can then be added as processes are investigated and documented further. For example, the following flow chart shows the more detailed activities and reports generated when actually preparing a tax provision at year end and the posting of year end journals. The diagram starts at the bottom with the source ledger data and follows the process upwards to the final reports.
If an even clearer picture of the department workflow is required, it is then possible to extend flow charts to cover the people responsible for each task as well as the amount of time it takes for them to complete their task. Using business process terminology, you create a “swim lane” for each person and show how their tasks interrelate. This will give an unambiguous view of interactions between team members and other departments within the organisation.
Timeline Another useful technique for giving a clearer picture of tax department processes and helping identify areas for improvement is to create a timeline of a given process, such as the compliance cycle.
Apr
Jun
Year End & ETR
PY Tax Accounting
May
Aug
Sep
Oct
Nov
Dec
Jan
Feb
Mar
Statutory accounts preparation
PY QIP 3
PY FINAL
PY QIP 4
PY QIPS / CT
Jul
Tax packs issued and returned Additional tax information (CFCs, Penalties, Share Schemes, Transfer pricing) PY Compliance
Comp due
Computation preparation Group payments and claims & elections
Ongoing HMRC correspondence in relation to prior years
CY QIP 2
CY QIP 1
CY Forecasts & QIPS
Year end audit and tax preparation
Interims & ETR
CY Tax Accounting
M&A activity
Other Budget revisions
Forecasts
Budgets
This has proved useful in educating other teams within the organisation of the pressures that are imposed on the tax team at certain times of the year. What to include? Any documentation of systems should also concentrate on the inputs, activities and outputs of the given process. Identifying the inputs is usually straightforward for the tax team, in that the sources of information used will be one of the following: ERP / Financials system (e.g. Oracle, SAP, PeopleSoft); Consolidation system (e.g. Hyperion, Cognos); Payroll; Fixed asset ledger; Stock control; Spreadsheets, including bespoke taxpacks. The activities to be included in the flow chart are different for each process being documented. However, a general rule of thumb is to include as much information as possible. If in doubt, include more detail! For example, it is helpful to record exactly how data is collected and tracked and how changes to source data are handled and recorded.
Once you have worked through each process, you then need to define the outputs of each stage. For example, the output from the tax provision process is the tax charge per the accounts, while the output from the compliance cycle is an agreed CT600 and computation. For transactional projects such as advice to the business on restructuring or planning, the outputs may be a report, a recommendation or a referral to a third party, given a set of decisions and circumstances. Other matters to consider The documentation of processes is the key to showing the evidence required for SAO compliance. However ensuring that the tax team are well versed on policies relating to shared network drives can be equally important. Remember somebody saved a really important spreadsheet somewhere and you can’t remember where it is? Which version is the most recent? Should I update links when I open it and where are the linked spreadsheets? For those who don’t use a version control system or a tax intranet (either bespoke or through using tools such as Sharepoint), it is vital to have policies and procedures for dealing with the myriad of spreadsheets that can stifle a corporate network. For example, the tax team need to have rules for: File and folder naming conventions; Version naming syntax; Methods for indexing folders; and Folder hierarchy organisation. Finally, another aspect of the review is how you intend to validate and test the processes as documented. You may wish to consider a third party or peer review to ensure objectivity. Dealing with your CRM Having prepared all this documentation, what do you do with it? We believe that the documentation provides the tax team with a valuable resource over and above the basic compliance with the SAO legislation. The key to dealing with your CRM in relation to the SAO initiative is communication. Our recommendation is therefore to share the process documentation you have created with your CRM in full. Obviously your SAO needs to be happy that this is OK, but it would seem to be the most open and transparent approach to take. Process improvements Finally, the SAO project and documenting current processes will more than likely highlight areas for improvement. Some may be “people-related” and some may be technological. Examples of where technology can help are: Data gathering; Interfacing; Tax analysis; Consolidation; Capital history management; and XBRL adoption.
However, improved processes can also aid with: Freeing up staff time for more value added work; More quality in reporting and better Business Intelligence (BI) analytics; More accurate forecasts; Easier and more comprehensive audit defence; and Greater knowledge sharing. Tax Automation specialise in working with in-house tax departments and have extensive experience in helping organisations reduce the time and effort required to review, document and improve tax processes and systems. If you would like to learn more about tax process documentation, improvements and SAO compliance, please call us for an informal chat on 0118 988 0241 or email
[email protected].
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