Out-Law News | 25 Feb 2014 | 9:43 am | 2 min. read
The figures show an increase of 57% on the £282m under investigation by HMRC's Large Business Service (LBS) in relation to Accounting Standards breaches in 2012. The LBS is responsible for the taxes paid by the UK's 770 largest businesses.
Tax expert Heather Self of Pinsent Masons said that the figures showed that HMRC was becoming more willing to challenge suspected misapplication of the statutory accounting standards if they thought that a change to a company's accounting policy could increase its tax bill.
"To tell a company that they and their auditors are misusing or misinterpreting accounting regulations is quite a charge to make," she said. "You are essentially saying that shareholders of that company have been given incorrect numbers. Listed companies and their auditors take the issue of accounting standards very seriously, so they are very surprised if HMRC challenges them in this area."
Issues that it was likely to challenge included the size and timing of losses from foreign exchange contracts, whether the size of provisions set aside for the mis-selling of financial products were appropriate and the treatment of intangible assets, she said. Some companies had experienced huge losses due to the recession and the volatile prices of currencies and commodities, forcing them to make decisions about when was the best time to recognise these losses for accounting purposes, she said.
"The recession has had a dramatic effect on UK corporations with many businesses writing down millions of pounds worth of debt, winding down defunct business areas and selling off assets," she said. "Even in good times the write-downs that follow an M&A deal can often run into the hundreds of millions, so there is a lot at stake in this area."
"Listed companies will often want to book all the losses as soon as they can so that they can draw a line under their problems; rather than continue to take losses over a longer period, which may demoralise shareholders. However, HMRC wants to make sure this isn't cutting into their tax take," she said.
Accounting standards are issued by the Financial Reporting Council (FRC) to comply with its statutory duties under the Companies Act. They are intended to reassure investors that all companies are assessing and reporting on the same financial controls and systems, and producing consistent annual accounts that can be compared on a like-for-like basis. They apply to all companies and to other entities that are required to prepare accounts that provide a "true and fair view".
Self said that HMRC was becoming much more confident in its ability to challenge big businesses over their accounting policy as it had used some of its increased compliance budget to hire more accounting specialists.
"Ten years ago, HMRC wouldn't have gone head to head with the financial reporting teams or auditors of a FTSE 100 company over their accounting principles, but now they see this as an important battleground," she said.