Where’s corporation tax going?

accapr —  24 May 2013 — Leave a comment

Chas Roy-Chowdhury-14

By Chas Roy-Chowdhury, head of taxation, ACCA

I gave evidence to the House of Lords Select Committee on Economic Affairs recently about corporation tax and how revenue is now being secured from companies through other means.

The bigger picture needs to be looked at when it comes to how corporations are taxed in the UK. There are other and additional ways by which companies in the UK are taxed, for example through VAT and through National Insurance Contributions (NICs).

A publication produced by the Office of National Statistics back in March, shows VAT numbers have held up remarkably well since the economic downturn because, the VAT rate has gone up to 20 per cent. That is probably what we need to look at in terms of the basket of taxes that we have moved towards—those companies that we know are going to be tied into the UK rather than those that can look at different locations to do business that are more favourable for them, taking tax as one of the factors and one of the components that they look at.

The fundamental problem is that large companies are by nature multinational – their shareholders, activities and customers are spread across the world – whilst national governments are not.

There is a tax chasm between what governments seek to capture by way of corporation tax and what companies, many of which are global in terms of their shareholders, activities and customers, generate in terms of global profits.

In practice, existing rules are highly complex and differences between countries can be exploited well within the law. HMRC has adapted to this and is not sitting on its laurels as some other Parliamentary committees have suggested. They are quick and effective and have developed a greater understanding of how companies work. The majority of corporations go through the tax process with ease. HMRC has achieved this despite declining resources.

ACCA wants to see tax simplicity. But that’s a big ask. Adam Smith’s four principles of what makes a good tax system – proportionality, transparency, convenience, and efficiency – still stand centuries later. I don’t think we’re near this and I also think we are in danger of losing trust in the tax system.

The House of Lords Economic Affairs Committee also raised the issue of naming and shaming those who have promoted aggressive tax avoidance or tax evasion schemes.

ACCA believes if naming and shaming is going to be introduced for tax avoidance, which is legal, the bar needs to be set very high. The complexity of the tax system means there is a risk that mis-interpretation could result in naming and shaming of a tax adviser; this could result in severe reputational damage.

We have long been calling for greater regulation of tax advice. While ACCA and other accountancy bodies have strict regulation and standards, anyone can set up and offer tax advice without those safeguards in place.

There’s no denying that all this is a very tricky and complex situation. But it is heartening to see that the issue is being discussed at international level, from the EU, to the US; and of course the G8 will be looking at the avoidance/evasion debate in June when it meets in Ireland.

In ACCA, Chas Roy-Chowdhury, HMRC, Tax, VAT , , , , , , , ,
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Don’t ignore the draft

aksaroya —  22 May 2013 — Leave a comment

By Barry Cooper, ACCA president

Engaging in the IIRC’s consultation is vital in developing the integrated reporting framework.

Barry Cooper-0513

It has always been a source of pride to me that ACCA has been at the forefront of developments within the accountancy profession – the move to ensuring that our syllabus was based on International Financial Reporting Standards (IFRS) being just one.

Now ACCA is once again demonstrating its pioneering credentials by not only being one of the first adopters of integrated reporting (IR) – having produced our most recent annual report to IR principles – but also by calling for the business community, companies and investors alike to ensure they help shape the future of IR.

We have urged these groups to respond to the International Integrated Reporting Council (IIRC) consultation draft on the integrated reporting framework to help develop a new corporate reporting model. This will enable organisations to communicate their activities more effectively and provide clear information to stakeholders.

In my meetings with members, employers and tuition providers, many have commented favourably on our first annual report produced along IR lines – which enabled our stakeholders to see the bigger picture brought together in what is hopefully an easily digested document. Our next report will be another step along the IR route.

But this initiative is not only an opportunity to demonstrate leadership and innovation in the accountancy profession. It is also critical that those you advise play their part in helping to shape the future of integrated reporting, by looking at issues and challenges which can be addressed now and which ensure that the IIRC gets the full picture.

You have a critical role to play, and I urge you and your companies to engage in the consultation process.

This post first appeared in Accounting and Business magazine, May 2013

In ACCA, Barry Cooper, Corporate reporting, IFRS, IIRC, Integrated reporting
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Capital quandary

aksaroya —  20 May 2013 — Leave a comment

By Manos Schizas, economic analyst at ACCA

Only a fraction of the world’s SMEs are funded by public equity. ACCA considers whether the world’s capital markets can do more for small issuers.

SME capital market

Xavier Rolet, CEO of the London Stock Exchange Group, has been making the rounds recently, drumming up support for Europe’s SMEs as the most reliable job creators in the region. He’s right, of course, in identifying the sector as a powerful engine of employment, but can the capital markets supply SMEs’ funding needs?

The dotcom boom of the late 1990s ended badly – or so I was taught in university. But more than a decade later it seems to me that it was a fantastically benign episode compared to the credit bubble that followed it. Though it had to end some time, it was the dotcom era that made today’s digital economy possible, bequeathing a digital and social infrastructure that we couldn’t live without today.

But perhaps the period’s most lasting legacy may be the stereotype of the twentysomething internet billionaire: starting a game-changing business in his or her basement, then taking it public a few years later, still in jeans, as the prospectus presented to the world. It’s a great story, but also a desperately rare one.

To this day, only a very small percentage of the world’s SMEs are funded by public equity. The figure varies by country but is typically in the low single digits. Because the total population of SMEs is so massive, this relatively small share still means that micro-caps and small caps (with a market capitalisation of less than $65m and $200m respectively) made up 64% of the world’s listed companies in 2011. But they accounted for only 14% of individual stock market trades and 4% of share trading volume, according to figures from the World Federation of Exchanges.

Illiquidity is a market-killer. It scares away investors looking for reliable exit opportunities as much as it does entrepreneurs looking for fair valuation. It also endangers the social mission of markets. Stock exchanges serve society by channelling funds to productive investment through price discover; this however means that liquidity is most crucial in those segments of the market in which issuers most critical future finance needs are still ahead of them.

Appropriately a recent report by UK think tank Centre Forum singled out stamp duty on sales of shares for criticism as an effective tax on liquidity. In the era of high frequency trading, some policymakers may even welcome this outcome. But even if there is such a thing as excess liquidity in capital markets – which is subject to fierce debate – when it comes to small listings, there is no liquidity to waste, no froth to skim.

Governments have used other tax incentives extensively to promote equity finance; after all the interest on debt is tax-deductible, which creates an uneven playing field. Emerging markets, from Jamaica and Trinidad and Tobago, to frontiers such as Cambodia, offer substantial tax breaks to listed firms, subject to clawbacks, as long as they remain listed for some years. Many governments also extend these breaks to investors. In the UK, for example, investments in the AIM exchange are now eligible for inclusion in stocks and shares ISAs.

While tax relief may encourage investors to hold onto more of their gains, the ears of tax and wealth advisers everywhere also prick up at the mere mention of a tax incentive. Tax relief may increase returns, but it is only one side of the equation. Small issuers are seen as riskier – and not without cause. Students of accounting are routinely taught from seminal studies that use business size is a proxy for risk. The lack of analyst following compounds this problem: analysts’ incentives are to generate recommendations for the sell-side and micro-caps simply cannot generate enough sales to justify their time. It is not impossible to develop alternatives, but they won’t come for free either.

Back in the UK, Centre Forum correctly identified the need for a new listing culture in which all stakeholders collaborate to encourage the financing of SMEs through public equity. Ironically, this is precisely the reality in less developed markets – where government, business associations, exchanges and the accountancy profession work hand in hand to groom prospective issuers.

Why not take a leaf out of their book? After all, secondary boards aimed at SMEs, however established the main exchange boards they are allied to, are perpetually in frontier market territory.

Meanwhile, the tiny but rapidly growing crowdfunding industry, which allows retail investors to put small amounts of equity towards promising start-ups, could introduce a whole new generation of potential investors to the concepts and risks of equity investment. Policymakers and exchanges have yet to see the link between crowdfunding and the capital markets, but they should.

For more information read Protecting stakeholder interests in SME companies: good practice adopting and promoting e-invoicing in the EU and The rise of capital markets in emerging and frontier economies.

This article first appeared in Accounting and Business magazine small business special edition, May edition, 2013.

In ACCA, Access to finance, capital markets, Manos Schizas, SMEs, Uncategorized , , ,
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Off the hook

aksaroya —  17 May 2013 — Leave a comment

Peter Williams, accountant and journalist, explores the contrast between the impassioned scapegoating of the ratings agencies during the onset of the financial crisis with the meek acceptance of the recent UK sovereign downgrade.

credit-rating

Credit-rating agencies have proven remarkably capable of withstanding the opprobrium of politicians. At the start of the financial crisis, politicians pilloried the agencies, and warned of dire consequences for their part in the crisis. But the tough talk has barely touched the work and the output of the rating agencies.

Perhaps inevitably, the discomfort of a UK sovereign downgrade from its coveted AAA status by the rating agencies has been seen partly through the prism of the political damage inflicted on UK chancellor George Osborne. But he is not alone: the UK has merely followed in the footsteps of the US and France in 2011 and 2012. A few weeks before Moody’s delivered its ratings verdict on the UK economy – and some would say on the chancellor’s stewardship – European politicians delivered theirs on how rating agencies should act in future. Those judgements could hardly have been more different.

The new EU rating agency rules amount to little more than an invitation to carry on as before. The final package aims to reduce the over reliance on ratings and make it easier to sue the agencies if they are judged to have made errors when, for example, ranking the creditworthiness of debt. In particular, the agencies will have to be more transparent when they are rating sovereigns, respect timing rules on sovereign ratings and justify the timing of publication of unsolicited ratings of sovereign debt. The politicians’ stance softened markedly during negotiations with the agencies. The proposal for a state-funded agency was quietly shelved. It is a far cry from the blood and thunder that politicians were threatening back when the financial crisis was still raw and unfolding. The mood then was summed up by US politician Henry Waxman, who declared: ‘The story of the credit-rating agency is a story of colossal failure.’ The agencies’ failure to spot the problem with securities had broken the bond of trust and put the entire global financial system at risk. They were told to expect a radical overhaul, perhaps an entirely new system. The House of Lords report into the agencies in July 2011 was tellingly entitled Sovereign Credit Ratings:shooting the messenger?

Shooting the Messenger?

The four-month inquiry criticised the agencies’ role in the 2008 banking collapse but concluded its EU sovereign downgrades ‘merely reflected the seriousness of the problems in some member states’. The politicians’ overall view on the agencies? They should learn from their past failure to spot emerging risks. Well, yes. A little later, at the height of the Eurozone crisis in August 2011, one leading politician agreed with the Lords’ stance: ‘Credit-rating agencies, however imperfect, are trying to give market investors some idea of the creditworthiness of economies and businesses. They did not cause this.’ Such a view is perfectly reflected in the light-touch ratings agency regulatory regime now swinging into operation. The politician who struck the conciliatory note of reality? Yes, you guessed it: he of the recent credit downgrade, UK chancellor George Osborne.

This article first appeared in Accounting and Business magazine, UK edition, April 2013

In Economy, Uncategorized
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Why balanced finance capability matters in finance today

accapr —  15 May 2013 — Leave a comment

research-insights92

By Jamie Lyon, head of corporate sector, ACCA

Reading a lot of the commentary on finance and the role of today’s CFO you’d be forgiven for thinking that today’s finance function spends all of its time on strategy formulation and execution. I don’t doubt for one second how important the role of finance as a strategic business partner to the organisation is, or the critical role progressive CFOs increasingly play in strategic support to the organisation. But it is also worth remembering the role the finance organisation plays in what I would call the fundamentals – cost management, cash-flow management, finance operations and so on. There are of course differences and changes in priorities – the strategy of the business, the prevailing state of the economy, its industry sector – are naturally factors which shape and influence the focus of finance leaders and the function at any given time. But it seems irrational to think that great finance functions are still not held to account on the strength of control and financial management of the organisation. This indeed is at the core of its fiduciary responsibilities. It’s also critical to get this right if you truly aspire to supporting the strategic agenda of the business – these multiple aims of the finance organisation are not mutually exclusive. Having this bedrock of broad finance capability is also, of course, particularly relevant in a period of on-going volatility and growth challenges.

We recently produced a report examining the future needs of the finance function, and the implications for developing the capabilities needed. The report, the complete finance professional, draws on a wide range of studies, including ACCA research specifically with CFOs and other finance leaders, to test these ideas out. The conclusions were very simple. Great finance functions needs to be able to draw on a wide range of finance capabilities. They can’t survive on staffing their functions with people schooled on a narrow version of management accounting, and this isn’t particularly healthy for developing the capabilities needed in future finance leaders either. Let’s consider the roles some finance professionals perform to illustrate the point – can financial analysts drive truly effective decision-making if they don’t have a broader understanding of risk; can internal auditors perform their roles effectively without a strong grounding across financial and management accounting disciplines; can accountants with investment appraisal responsibilities get by with no awareness of tax, or regulatory changes which may have implications on project benefits…and so on. I don’t quite think so.

Secondly, with public debt, currency instability, emerging market growth, commodity price rises and many other signs of significant volatility, finance leaders themselves are in a huge period of flux, change and uncertainty; we know the role of CFOs continues to evolve but it’s the shear breadth of skills and knowledge that is now called into play; also given the level of volatility in the global economy we see a real call out to balance the quest for growth with the need for control – this ‘balanced finance leadership’ really is as a hallmark of the top finance job right now. The report also comes to other simple conclusions – a recognition that the changing face of finance operations with the advent of shared services, outsourcing, centres of excellence and the retained organisation demands both excellence in traditional finance capabilities (e.g. process mastery, transparency in controls, specialised finance expertise) as well as new capabilities (transformation, project management, dealing with change, customer centricity and so on); and that strong finance functions earn the partnering mandate best by ensuring effective finance stewardship of the organisation as a strong foundation; in short you can’t neglect one for the other, it doesn’t quite work like that.

At ACCA we continue to advocate the need for breadth and depth of financial understanding in finance functions today.

In ACCA, CFO, Finance Transformation, Jamie Lyon , ,
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