Accounting Package Selection

Selecting the right accounting package can be difficult, particularly as there are so many packages on the market. Price and functionality vary so widely it can make objective comparisons very difficult without spending a number of days on the selection process. The availability of internet (cloud-based) accounting packages has complicated the selection process.

We have set out below some areas you should consider when making your selection:

Determining your requirements

A decision is required first as to the level of complexity required from a new system.

At the most basic level, you need to decide whether you just want something to replace a spread sheet or cash-book, to handle receipts and payments, or whether a more sophisticated ledger-based system to produce quotes, VAT returns, and monthly accounts would be more appropriate.

You may decide that you need a highly sophisticated system which, as well as doing all of the above, can also handle stock control and job costing and can also integrate with a web site.

Online or in-house?

The next key decision is whether you want to run your accounting functions in-house, or over the internet using a web-based provider. There are advantages and disadvantages either way. For example, an online solution will involve a recurring monthly/quarterly fee for the service whereas an in-house solution may involve a one-off purchase price plus any annual licence and upgrade fees. Another consideration with an online solution is how secure the data is and can it be retrieved in the event the provider “disappears” or goes into administration/receivership?

The growing business

Think about what the business might be doing in say, 12-18 months’ time:

• Will it be going through rapid growth or a change in direction, and need more up to date and more accurate financial information, such as profitability at department or cost centre level?
• Will transaction volumes be rising steeply?
• Will you want to be able to connect your products to your web site and process orders and payments online?

Market sector

Your business may be in a specialist market sector for which there are tailor made systems already available. Talk to us as we have experience of your type of business. Talk to your trade body/trade association or local Chamber of Commerce as they may already produce information to help you, and they may hold events and seminars on this issue.

Cost

Many software vendors now use a subscription based model as opposed to the more traditional one-off licence fee.

Subscription based pricing is usually based on a regular monthly or quarterly fee – which for cash flow purposes may suit some organisations.

However, cost should not be the deciding factor. If you are only willing to spend, say £100, or £10/month, the system will be unlikely to meet all of your needs. This in turn may place constraints on the way the business trades, and subsequently turn out to be a hindrance to expansion. It may also mean that more expenditure and upheaval is required should you need to upgrade to a more expensive system in the future.

Some systems are available in modules or in different bundles – make sure you know exactly what you need.

Your detailed business requirements

A list of your detailed business requirements would be useful when comparing packages. The following pointers need to be considered in the context of your business:

General points

• What is the operating system for your computer network? (There is less of a choice of accounting packages if using a non-Windows platform).
• How many users will require concurrent access (now or in the future)?
• What volume of transactions will you be processing and can the software handle this?
• Can the system produce VAT returns and, if you are on a special VAT scheme, can it cope with this?
• Can orders and payments be taken over the internet and downloaded to the accounting system?
• Will the system let you export data to other packages such as spreadsheets and word processing packages?
• Do you need to access the system off-site from a mobile device or remote PC link?

Your specialist processing requirements

Here is a sample list – you will need to add your own special requirements depending on the nature of your business:

• retentions
• deposits/subscriptions/donations
• discounts – quantity discounts, value discounts and prompt/early-payment discounts
• part-payments/part-receipts/part-delivery
• foreign currency customers and suppliers, and foreign currency fluctuations
• processing adjustments such as bounced cheques, bad debt write-offs, refunds etc
• direct debits/standing orders (receipts and payments) and multiple debit/credit card accounts
• accruals and prepayments
• loans, grants, mortgages, HP agreements and any special payment types and terms
• component stocks and bill of materials
• mixing of service and stock items on an invoice and as separate stock records
• payments to suppliers electronically (via BACS)
• label and mail shot capabilities for customers/suppliers
• ability to create XML formatted transactions (to facilitate electronic transmission to other systems)
• debt factoring/financing (may require specific work rounds)
• data import and data export requirements

Your information and reporting requirements

You need to determine what kind of management and user information is required from the system.

A sample list might include:

• financial reports – trial balance, profit and loss, balance sheet, cash flow and turnover reports
• key ratios and other business metrics
• actual vs budget reports
• work in progress and profit/loss on job or contract
• profit/loss by department, or by cost centre or other levels of analysis
• customer/supplier balances and aged debtors/aged creditors
• statements and invoices

Other points

• How does the system cope if you need to amend a transaction?
• Is there a full audit trail (including details of modified transactions)?
• Does the system produce the information in an acceptable form to you and us (as your accountant) in order to complete all statutory and regulatory financial year-end and fiscal year-end tasks?
• Does the system enable statutory online filing (VAT returns and EC Sales List returns for example)
• Are there adequate security routines to prevent unauthorised access?

Training

Training for your new system and new procedures is vital for the staff that will be using the system on a day-to-day basis. Do not assume that an experienced user would not benefit from training.

We may be able to provide training for you or help you find appropriate training.

The final choice

• Narrow the selection down to the package(s) that matches your needs most closely.
• If the potential user(s) of the system have not so far been involved, now is the time to get them involved.
• Get an evaluation or trial copy if possible (some software vendors offer a free 30-day trial for example), and also go and see the system in action at a business similar to yours.

Having performed an objective review up until now, the final choice may be more subjective. It will probably be down to look and feel of the system at the end of the day!

Implementation

Whilst the beginning of the financial year is the most logical time to start, this may not be a particularly convenient time for the accounts staff.

You may wish to discuss the timing with us, as we can help in drawing up a list of opening transactions and the opening trial balance at the appropriate time.

Other issues to think about at this stage are:

• customer/supplier/nominal and cost centre/stock/job costing codes
• designing/ordering pre-printed stationery (invoices for example)
• creating records and posting opening transactions (if you already have a system in place it may be possible to import some or all of this data)
• developing periodic processing, authorisation and verification routines
• backup and restore procedures for the accounting data files
• long-term retention of accounting data (minimum of 6 years).

How we can help

We are here to help you with any of the steps involved in choosing and implementing an accounting package. Please contact us for further advice.

Child Benefit Charge

The High Income Child Benefit charge applies to a taxpayer who has income over £50,000 in a tax year where either they or their partner, if they have one, are in receipt of Child Benefit for the year.

We set out below the main points of the charge and illustrate some of the practical issues.

Does this affect my family?

The High Income Child Benefit charge is payable by a taxpayer who has ‘adjusted net income’ (explained later) in excess of £50,000 where either they or their partner, if they have one, are in receipt of Child Benefit. Where there is a partner and both partners have adjusted net income in excess of £50,000 the charge only applies to the partner with the higher income.

Practical issues

Some couples with fluctuating income levels may find that they are caught by the charge or perhaps that the partner who usually has the highest income does not actually end up paying the charge as the following example illustrates.

Example Nicola who receives Child Benefit is employed as a teacher and earns £52,000 a year. Her husband Alan is a self-employed solicitor and his accounting year end is 31 March. He is late in submitting his books and records to his accountant for the year ended 31 March 2015. His results for that year will form his taxable profit for 2014/15. Nicola and Alan do not have any other income other than their earned income but his profits are generally in excess of £60,000. On this basis Nicola assumes that Alan will be liable for the charge. In January 2016 Alan’s accountant completes his tax return, files this in advance of the 31 January deadline and advises that his profit has reduced to £48,000 as he had experienced a number of bad debts. As a result Nicola has the highest income for 2014/15 and is therefore responsible for paying the charge by 31 January 2016 and she will need to contact HMRC about this.

For couples who do not share their financial details there is a problem as it is difficult to accurately complete their tax return (or know if they need to contact HMRC to request one) if their own income is over £50,000 and Child Benefit is being claimed. Only the highest earning partner is liable so this will need to be determined.

Changes in circumstances

As the charge is by reference to weeks, the charge will only apply to those weeks of the tax year for which the partnership exists. If a couple breaks up, the partner with the highest income will only be liable for the period from 6 April to the week in which the break up occurs.

Conversely, if a couple come together and Child Benefit is already being paid, the partner with the highest income will only be liable to the charge for those weeks from the date the couple start living together until the end of the tax year.

So what is the adjusted net income of £50,000 made up of?

It can be seen that the rules revolve around ‘adjusted net income’, which is broadly:

• income (total income subject to income tax less specified deductions e.g. trading losses and payments made gross to pension schemes)
• reduced by grossed up Gift Aid donations to charity and pension contributions which have received tax relief at source.

In some cases it may be that an individual may want to donate more to charity or make additional pension contributions for example, to reduce or avoid the charge.

Inequity applies as household income is not taken into account.

Therefore, equalising income for those who have the flexibility to do so such as in family partnerships or family owner managed businesses is important.

Who is a partner for the purpose of the charge?

A person is a partner of another person at any time if any of the following conditions are met at that time. The persons are either:

• a man and a woman who are married to each other and not separated or
• a man and a woman who are not married to each other but are living together as husband and wife.

Similar rules apply to same sex couples.

The charge

An income tax charge will apply at a rate of 1% of the full Child Benefit award for each £100 of income between £50,000 and £60,000. The charge on taxpayers with income above £60,000 will be equal to the amount of Child Benefit paid.

Example for 2014/15 The Child Benefit for two children amounts to £1,770 per annum. The taxpayer’s adjusted net income is £55,000. The income tax charge will be £885. This is calculated as £1,770 x 50% (£55,000 – £50,000 = £5,000/£100 x 1%).

How will the administration operate?

In the self assessment system individuals are required to notify HMRC if they have a liability to income tax, capital gains tax and the High Income Child Benefit Charge by 6 October following the tax year. This requirement is amended to include situations where the person is liable to the Child Benefit charge.

In addition, the charge is included in PAYE regulations so that it can be collected through PAYE, using a reduced tax code. It is also included in the definition of tax liability, so that it could potentially affect payments on account and balancing payments.

So should you continue to claim Child Benefit?

It is important to appreciate that Child Benefit itself is not liable to tax and the amount that can be claimed is therefore unaffected by the charge. It can therefore continue to be paid in full to the claimant even if they or their partner have a liability to the charge.

On the other hand Child Benefit claimants are able to elect not to receive the Child Benefit to which they are entitled if they or their partner do not wish to pay the charge. However, this will not affect the credit available (for state pension purposes) to certain people who stay at home to look after children (provided that an initial claim for child benefit has been made when the child is born).

An election can be revoked if a person’s circumstances change.

But I don’t receive a tax return?

It may well be that you and/or your partner have not received a tax return before but this may need to change. Remember you need to tell HMRC by 6 October 2015 if you think a charge may be due for 2014/15.

Guidance

HMRC have issued some guidance on the charge and the options available which can be found at https://www.gov.uk/child-benefit-tax-charge.This should be essential reading for many families.

How we can help

If you are unsure about anything to do with this charge or would like to discuss the matter further including how we might be able to minimise the tax charge which may apply to your family, please do not hesitate to contact us.

VAT – Seven Key Points for the Smaller Business

This factsheet focuses on VAT matters of relevance to the smaller business. A primary aim is to highlight common risk areas as a better understanding can contribute to a reduction of errors and help to minimise penalties. Another key ingredient in achieving that aim is good record keeping, otherwise there is an increased risk that the VAT return could be prepared on the basis of incomplete or incorrect information.

This aspect is not considered further here but useful guidance can be found on the GOV.UK website  keeping-records-for-business-what-you-need-to-know

Input VAT matters

Only registered traders can reclaim VAT on purchases providing:

• the expense is incurred for business purposes and
• there is a valid VAT invoice for the purchase.

Only VAT registered businesses can issue valid VAT invoices. VAT cannot be reclaimed on any goods or services purchased from a business that is not VAT registered. Proforma invoices should not be used as a basis for input tax recovery as this can accidentally lead to a duplicate VAT recovery claim.

Most types of supply on which VAT recovery is sought must be supported by a valid VAT invoice. This generally needs to be addressed to the trader claiming the input tax. A very limited list of supplies do not require a VAT invoice to be held to support a claim, providing the total expenditure for each taxable supply is £25 or less (VAT inclusive). The most practical examples of these are car park charges and certain toll charges.

The following common items however never attract input VAT and so no VAT is reclaimable – stamps, train, air and bus tickets, on street car parking meters and office grocery purchases like tea, coffee and milk!

Business purpose

This is often an area of contention between taxpayers and HMRC as VAT is not automatically recoverable simply because it has been incurred by a VAT registered person.

In assessing whether the use to which goods or services are put amounts to business use (for the purpose of establishing the right to deduct input tax), consideration must be given as to whether the expenditure relates directly to the function and operation of the business or merely provides an incidental benefit to it.

Private and non-business use

In many businesses, personal and business finances can be closely linked and input tax may be claimed incorrectly on expenditure which is partly or wholly for private or non-business purposes.

Typical examples of where claims are likely to be made but which do not satisfy the ‘purpose of the business’ test include:

expenditure related to domestic accommodationpursuit of personal interests such as sporting and leisure orientated activitiesexpenditure for the personal benefit of company directors/proprietors andexpenditure in connection with non-business activities.

Where expenditure has a mixed business and private purpose, the related VAT should generally be apportioned and only the business element claimed. Special rules apply to recover input tax claimed on assets and stock (commonly referred to in VAT as goods) when goods initially intended for business use are then put to an alternative use.

Example Three laptops are initially bought for the business and input VAT of £360 in total is reclaimed. One is then gifted by the business owner to his son so VAT will have to be accounted for to HMRC of £120 (1/3 x £360)

Business entertainment

VAT is not reclaimable on many forms of business entertainment but VAT on employee entertainment is recoverable. The definition of business entertainment is broadly interpreted to mean hospitality of any kind which therefore includes the following example situations:

• travel expenses incurred by non employees but reimbursed by the business, such as self employed workers and consultants
• hospitality elements of trade shows and public relations events.

Business gifts

A VAT supply takes place whenever goods change hands, so in theory any goods given away result in an amount of VAT due. The rule on business gifts is that no output tax will be due, provided that the VAT exclusive cost of the gifts made does not exceed £50 within any 12 month period to the same person.

Where the limit is exceeded, output tax is due on the full amount. If a trader is giving away bought-in goods, HMRC will usually accept that he can disallow the tax when he buys the goods, which may be more convenient than having to pay output tax every time he gives one away.

Routine commercial transactions which might be affected include such things as:

• long service awards
• Christmas gifts
• prizes or incentives for sales staff.

Cars and motoring expenses

Input tax errors often occur in relation to the purchase or lease of cars and to motoring expenses in general. Some key issues are:

• Input VAT is generally not recoverable on the purchase of a motor car because it is not usually exclusively for business use. This prohibition does not apply to commercial vehicles and vans, provided there is some business use.
• Where a car is leased rather than purchased, 50% of the VAT on the leasing charge is not claimed for the same reason.
• Where a business supplies fuel or mileage allowances for cars, adjustments need to be made to ensure that only the business element of VAT is recovered. There are a number of different methods which can be used, so do get in touch if this is relevant to you.

Output VAT issues

Bad debts

Selling on credit in the current economic climate may carry increased risk. Even where credit control procedures are strong there will inevitably be bad debts. As a supplier, output VAT must normally be accounted for when the sale is initially made, even if the debt is never paid, so there is a risk of being doubly out of pocket.

VAT regulations do not permit the issue of a credit note to cancel output tax simply because the customer will not pay! Instead, where a customer does not pay, a claim to recover the VAT on the sale as bad debt relief can be made six months after the due date for payment of the invoice.

Example A trader supplies and invoices goods on 19 October 2014 for payment by 18 November 2014 (ie a normal 30 day credit period). The earliest opportunity for relief if the debt is not settled would be 18 May 2015. The relief would be included in the return into which this date fell, depending on the return cycle of the business.

The amount of the claim

The taxpayer can only claim relief for the output tax originally charged and paid over to HMRC, no matter whether the rate of VAT has subsequently changed. The claim is entered as additional input VAT – treating the uncollected VAT as an additional business expense – rather than by reducing output VAT on sales.

The customer

A customer is automatically required to repay any input VAT claimed on a debt remaining unpaid six months after the date of the supply (or the date on which payment is due if later). Mistakes in this area are so common that visiting HMRC officers have developed a programme enabling them to review Sage accounting packages and to list purchase ledger balances over 6 months old for disallowance.

Preventing the problem?

Small businesses may be able to register under the Cash Accounting Scheme, which means you will only have to account for VAT when payment is actually received.

How we can help

Please contact us if you require any further guidance on VAT issues for your business.

Patent Box

The Patent Box provides a reduced rate of corporation tax for companies exploiting patented inventions or certain other innovations protected by particular intellectual property (IP) rights.

How it works

The reduced rate applies to a proportion of the profits derived from the licensing or sale of the patent rights or from the sale of the patented invention or products which incorporate the patented invention. Profits derived from routine manufacturing, development or exploitation of brands and marketing intangible assets are excluded.

The reduced rate of tax is given by providing an additional deduction in the corporation tax computation.

To minimise administrative costs, Patent Box profits for many claims can be calculated using a formulaic approach which is intended to identify, in most circumstances, a reasonable figure for profit derived from the patent. Companies can opt to identify the profit through a more detailed calculation (not considered in this factsheet).

The election allows a deduction to be made in calculating the profits of the trade period. The amount of the deduction is:

(RP x (MR – IPR)) / MR

where:

• RP is the relevant IP profits of the trade of the company,
• MR is the main rate of corporation tax, and
• IPR is the special IP rate of corporation tax (10%).

HMRC Example

If a company has trade corporation tax profits of £1,000, which qualify in full for the Patent Box when the main rate of tax is 22%, then instead of arriving at a tax charge of £100 by multiplying £1,000 by 10%, the calculation proceeds as follows:

Profits of Company’s trade chargeable to CT	£1,000
Patent Box Deduction 1,000 x (22-10)/22	£545 _____
Profit Chargeable to corporation tax	£455 _____
Tax Payable £455 x 22%	£100 _____

This approach is used, rather than directly charging the relevant profits at 10%, to avoid complications if the company claims losses or other reliefs and to simplify the way the Patent Box will be administered on corporation tax returns.

The formula is the same for companies charged at the main rate of corporation tax and for companies charged at the small profits rate, or at the main rate with marginal relief. This means that in some cases Patent Box profits may be charged at a little below 10%.

Phasing in of the regime

The regime applies to accounting periods commencing on or after 1 April 2013 and is to be phased in over the following four financial years.

The phasing in is achieved by applying the appropriate percentage to the relevant IP profits of the company for each accounting period as follows:

2013 – 60%
2014 – 70%
2015 – 80%
2016 – 90%

Conditions

The company must be a qualifying company and own or hold a license for a UK or European patent. There are two main conditions:

• the company must have undertaken qualifying development by making a significant contribution to the creation or development of the item protected by the patent or a product incorporating this item; and
• if the company holds a license in patent rights, the license must give it exclusivity for those rights. This must extend at least country-wide.

There are a number of detailed conditions and qualifying criteria within the scheme. We will be happy to discuss this matter in more detail.

How we can help

Please contact us if you would like more information on the Patent Box regime.

Incorporation

The issue of whether to run your business as a company or a sole trade or partnership is an important decision. In this factsheet, we summarise the relevant tax changes and show the potential tax savings currently available from operating as a company.

This factsheet calculates the position for 2015/16.

In addition we consider other relevant factors including potential disadvantages.

Tax savings

The examples below give an indication of the 2015/16 tax savings that may be achievable for husband and wife who are currently in partnership.

Profits:	£30,000	£50,000	£100,000
Tax and NI payable:	£	£	£
As partners	3,302	9,102	25,580
As company	2,776	6,776	18,106
Potential saving	526	2,326	7,474

The extent of the savings is dependent on the precise circumstances of the couple’s tax position and may be more or less than the above figures. The examples are computed on the basis that the couple:

• share profits equally
• have no other sources of income
• both partners take a salary of £8,060 from the company with the balance (after corporation tax) paid out as a dividend.

When might a company be considered? A company can be used as a vehicle for: a profitable trade buy-to-let properties.

Summary of relevant tax and national insurance rates

Rate of corporation tax

Profits are taxed at 20%.

National Insurance

The rate of employees’ NIC is 12%. In addition, a 2% charge applies to all earnings over the NIC upper earnings limit (which is £42,385 from 6 April 2015). The rate of NIC for the self-employed is 9%, and 2% on profits above £42,385 from 6 April 2015.

All NI contributions can be avoided by incorporating, taking a small salary up to the threshold at which NI is payable and then taking the balance of post-tax profits as dividends.

Pension provision

As an employee/ director of the company, it should be possible for the company to make pension contributions (subject to limits) to a registered fund irrespective of the salary level, provided it is justifiable under the wholly and exclusive rule. For further details of the tax position of pension provision for individuals see the factsheet on Pensions – Tax Reliefs. Such contributions are deemed to be a private expense for sole traders or partners.

Other tax issues

It is all too easy to focus exclusively on the potential annual tax savings available by operating as a company. However, other tax issues can be equally, and in some cases more significant and should not be underestimated.

Capital gains

Incorporating your existing business will involve transferring at least some of your assets (most significantly goodwill) from your sole trade or partnership into your new company. The transfer of goodwill may create a significant capital gain although there is a mechanism for deferring the gain until any later sale of the company if the business is transferred in exchange for shares in the company. If goodwill is sold to the company for cash or debt on or after 3 December 2014, individuals will be prevented from claiming Entrepreneurs’ Relief (ER). Capital gains tax will be payable on the gain at the normal rates of 18% or 28% rather than 10%. Following consultation, the legislation will be revised to allow ER to be claimed by partners in a firm who do not hold or acquire any stake in the successor company.

We will need to discuss in detail with you the most appropriate mechanism for your business.

Stamp Duty Land Tax (SDLT)

There may be SDLT charges to consider when assets are transferred to a company. Goodwill and debtors do not give rise to a charge, but land and buildings may do so.

Income tax

The precise effects of ceasing business in an unincorporated form, including ‘overlap relief’ need to be considered.

Capital allowances

Once again the position needs to be carefully considered.

Other advantages

There may be other non-tax advantages of incorporation and these are summarised below.

Limited liability

A company normally provides limited liability. If a shareholder’s shares are fully paid he cannot normally be required to invest any more in the company. However, banks often require personal guarantees from the directors for borrowings. The advantage of limited liability will generally apply in respect of liabilities to other creditors.

Legal continuity

A company will enjoy legal continuity as it is a legal entity in its own right, separate from its owners (the shareholders). It can own property, sue and be sued.

Transfer of ownership

Effective ownership of the business may be more readily transferred, in comparison to a business which is not trading as a limited company.

Borrowing

Normally a bank is able to take extra security by means of a ‘floating charge’ over the assets of the company and this will increase the extent to which monies may be borrowed against the assets of the business.

Credibility

The existence of corporate status is sometimes deemed to add to the credibility or commercial respectability of the business.

Pension schemes

The company could establish an approved pension scheme which may provide greater benefits than self-employed schemes.

Staff incentives

Employees may, with adequate safeguards, be offered an opportunity to acquire an interest in the business, reflecting their position in the company.

Disadvantages

No analysis of the position would be complete without highlighting potential disadvantages.

Administration

The annual compliance requirements for a company in terms of administration and accounting tend to result in costs being higher for a company than for a sole trader or partnership. Annual accounts need to be prepared in a format dictated by the Companies Act and, in certain circumstances, the accounts need to be audited by a registered auditor.

Details of the directors and shareholders are filed on the public register held by the Registrar of Companies.

Privacy

The annual accounts have to be made available on public record – although these can be modified to minimise the information disclosed.

PAYE/Benefits

If you do not have any employees at present, you do not have to be concerned with PAYE and returns of benefits forms (P11Ds). As a company, you will need to complete PAYE records for salary payments and keep records of expenses reimbursed to you by the company. Forms P11D may have to be completed.

Dividends

If you will require regular payments from your company, we will need to set up a system for you to correctly pay dividends.

Transactions with the business owner

A business owner may introduce funds to and withdraw funds from an unincorporated business without tax implications. When a company is involved there may be tax implications on these transactions.

Director’s responsibilities

A company director may be at risk of criminal or civil penalty proceedings eg for late filing of accounts or for breaking the insolvency rules.

How we can help

There may be a number of good reasons currently for considering use of a company as part of a tax planning strategy. However as you can see from this factsheet, there are many factors to consider. We would welcome the opportunity to talk to you about your own specific circumstances. Please do not hesitate to contact us.

Company Secretarial Duties

Company legislation provides an opportunity for a business organisation to benefit from the protection of limited liability, separating the legal persona of the organisation from the individuals who own it.

In return for this protection a certain amount of information about a company must be publicly available including, for example, the company’s annual accounts, registered office address and details of directors, company secretary (if there is one) and members. Historically, providing and updating this information has been the job of the company secretary.

Do all companies need a company secretary?

There is no longer a requirement for all companies to appoint a company secretary. Private companies (whose name ends in ltd) do not generally need to appoint a company secretary to deal with this paperwork, unless they either wish to do so or their Articles of Association (their governing document) requires them to do so.

Public limited companies (whose name ends in plc) must still have a company secretary who must have specialist, up to date knowledge of company law.

The company secretary is an officer of the company. This means that they may be criminally liable for company defaults, for example, failing to file a document in the time allowed or to submit the company’s annual return.

If your private company does not want to have a company secretary

If a private company decides not to have a company secretary then it should check its Articles of Association to ensure that its own regulations do not require it to appoint one. The company should inform Companies House of the resignation of any existing company secretary.

Where a private company chooses not to have a company secretary, any item that would normally be sent to the company secretary is treated as being sent to the company. Any duties which would normally be the responsibility of the company secretary will be carried out either by a director or a person authorised by the directors.

The company secretary and Companies House

A company secretary, or in the case of a private company the person responsible for company secretarial duties, will have regular dealings with Companies House as this is where public records about the company are held.

Most communications with Companies House nowadays will be online using a computer package or through the Companies House dedicated website. Companies House is hoping to move towards 100% online filing.

Company secretarial duties

The duties of the person responsible for company secretarial matters are not defined specifically within company law but may be divided generally into three main areas:

• maintaining statutory registers (keeping the company’s records up to date)
• completing and filing statutory forms (keeping the public record up to date)
• meetings and resolutions (making sure the company abides by both its internal regulations and the law).

Maintaining statutory registers

All companies must maintain up to date registers of key details, these include:

• a register of members
• a register of directors
• a register of charges.

The details in these registers include, for example, names, addresses, dates of appointment and resignation (for directors) and for members, the number and type of shares held. This is not an exhaustive list.

These registers must be made available for inspection by the general public at the company’s registered office or at a single alternative inspection location (SAIL) which must also be recorded at Companies House.

A company may choose to keep its directors’ residential addresses private and to record a service address for them. If so it will need to keep an additional register showing the directors’ residential addresses which is not open to inspection by the general public.

Completing and filing statutory forms

The company must ensure that their record at Companies House is always up to date and contains current details of various statutory matters.

Many of the more common types of information can be submitted on line by first registering at www.companieshouse.gov.uk. Alternatively Companies House currently has a series of over 200 statutory forms to allow paper filing.

The company secretarial duties would extend to ensuring that, for example:

• the company’s annual accounts are filed on time at Companies House. For a private limited company, under normal circumstances, this must be within 9 months of the end of the accounting year. A fine will be levied if the accounts are late
• the company’s annual return is completed and filed. This is a snapshot of the information held by the Registrar of Companies about the company, which must be checked and amended if necessary within 28 days of a given due date. If this information is returned late or not returned at all, the company, director(s) and secretary (if appointed) may be prosecuted
• If a company does not deliver its annual return the Registrar might assume that the company is no longer carrying on business and take steps to strike it from the register
• all changes to the way the company is organised are notified to Companies House. The most common changes might include:

• changes in directors, secretaries and their particulars
• a change of accounting reference date
• a change of registered office
• allotments of shares

• the current version of the company’s Articles of Association is filed whenever a change in the company’s internal rules is made.

Often this information must be filed at Companies House within a specified period of between 14 to 28 days following the change.

Charges

When a company gives security for a loan either the lender or borrower should notify Companies House within 21 days, by filling in the appropriate form and paying the statutory charge. Without timely registration the charge will be void – that is, the loan will still be repayable but the security given will not be valid. This does not apply to property acquired which is subject to a charge.

Good company secretarial practice ensures that any charges created are registered and indeed the company’s credit profile is protected by removing the charge from the register as soon as the loan is repaid.

Meetings and resolutions

Company law sets out procedures for conducting certain aspects of company business through formal meetings where resolutions will be passed. When resolutions are passed, the company is bound by them (a resolution is an agreement or a decision taken by the members).

Here the company secretarial role would be to ensure that proper notice of meetings is given to those who are entitled to attend, to minute the proceedings and to ensure that copies of resolutions which affect the way the company is run are sent to Companies House within the relevant time frame.

Notice of company meetings

Members and auditors are entitled to notice of company meetings. For a private limited company a general meeting notice of at least 14 days is needed. Notice can be in writing, by email or by means of a website (if certain conditions are met). However, a private company is no longer required to hold an Annual General Meeting (AGM), unless the company’s Articles of Association make express provisions for holding AGMs.

If an existing company with an existing express provision for an AGM wishes to abolish this requirement, it will need to change its articles by special resolution.

Resolutions

There are two types of resolution that may be passed, ordinary resolutions (passed by a simple majority of the members) or special resolutions (passed by a 75% majority of the members). In general, resolutions will be voted on by any members present at a meeting.

Private companies can take most decisions by written resolution. Such a resolution does not require a hard copy and can be passed by email. These resolutions however, need to be passed by a majority of all members of the company, not just by those who return the voting form!

It is important that companies retain copies of all important decisions taken in the management of the company where they are taken at a meeting or by written resolution. Where these decisions change the way a company is run, a copy needs to be filed at Companies House.

Keeping your public record safe

Companies House has recently reported increasing levels of fraudulent filing of information. A favourite ploy is to change the company’s registered office by submitting the appropriate form to Companies House. Once this has been accepted, the fraudsters can change directors or file false accounts without the company having any idea that they have been hijacked! They can then buy goods or obtain credit based on this false information.

Companies House is keen that companies file their information online. This can be a very secure method, particularly if the company signs up for the enhanced security arrangements offered by their PROOF (protected online filing) system, which prevents the paper filing of certain forms.

How we can help

If you would like to discuss any of the issues raised above please do contact us. We are able to provide comprehensive assistance with company secretarial matters such as:

• the maintenance and safekeeping of the company registers
• the processing and filing of minutes
• the preparation and filing of resolutions
• the completion and filing of statutory forms
• the filing of the annual accounts
• filing online.

Even though the need to appoint a company secretary in a private company has been abolished, there are a number of statutory procedures that companies must continue to comply with. We would be pleased to discuss these with you.

Recruitment Procedures – Employment Law

Most claims for discrimination in recruitment have no maximum limit.

Can your business afford compensation of perhaps £20,000 because you made a simple mistake?

How do you make sure you don’t break the law?

We set out below the main principles involved in the recruitment of employees. We have written this factsheet in an accessible and understandable way but some of the issues may be very complicated.

Professional advice should be sought before any action is taken.

Good recruitment procedures

Employers recruiting staff can make simple but very expensive mistakes in all sorts of ways when trying to take on new staff. Sound recruitment procedures help avoid mistakes, as well as ensure that your recruitment process improves and you take on better staff as well.

Where can things go wrong?

You can easily make mistakes at various stages in the recruitment process that would probably mean you would lose your case at an Employment Tribunal.

These stages include:

• defining the job itself or identifying the person required
• attracting candidates by advertising
• how you assess the candidates you see
• making the actual selection decision
• the terms of employment that you offer.

The danger, quite apart from the cost of recruiting the wrong person and then having to get rid of them and recruit again, is that someone whom you have turned down at some point in the process may complain to an Employment Tribunal that you discriminated against them in accordance with the Equality Act 2010. If the Tribunal finds the claim to be valid then compensation can be awarded not just for actual loss but also to compensate for projected future loss and what is known as ‘injury to feelings’.

Equality Act 2010

The Equality Act 2010 replaces all previous equality legislation, and covers age, disability, gender reassignment, race, religion or belief, sex, sexual orientation, marriage and civil partnership and pregnancy and maternity. These are now called ‘protected characteristics’.

Discrimination

Discrimination occurs when someone is treated less favourably than another person because of their protective characteristic. There are four definitions of discrimination:

Direct Discrimination: treating someone less favourably than another person because of their protective characteristic

Indirect Discrimination: having a condition, rule, policy or practice in your company that applies to everyone but disadvantages people with a protective characteristic

Associative Discrimination: directly discriminating against someone because they associate with another person who possesses a protected characteristic

Perceptive Discrimination: directly discriminating against someone because others think they possess a particular protected characteristic

Acts of discrimination would involve either establishing different, unjustifiable and therefore discriminatory recruitment criteria or deliberately excluding certain categories, for example, ‘men only may apply’. Indirect Discrimination is not as obvious (and indeed employers can find themselves committing indirect discrimination quite unintentionally and innocently).

Examples of indirect discrimination would include:

• setting recruitment criteria which are not actually justified by the job or job description but which have the effect of discriminating against certain groups of people (eg requiring exam qualifications suggesting skills which are not actually needed by the job and which could discriminate against individuals with learning difficulties)
• using assessment tests measuring abilities not required by the job but which could discriminate against groups of people (ie reasoning ability tests for unskilled manual jobs which could discriminate against those without English as a first language)
• setting different tests for different applicants for a job (eg female applicants cannot be asked to carry out tests of physical strength if male applicants are not asked to do the same)
• asking questions of some applicants and not of others (the classic and very common example being that of asking a female applicant when she intends starting a family).

In considering whether an act of indirect discrimination has occurred or not, an Employment Tribunal can draw reasonable inferences from an employer’s normal practices in addition to looking at the facts of the particular case. The Tribunal members might for example, in the case of a claim for racial discrimination, look at the ethnic makeup of the existing workforce and compare this with the ethnic makeup of the local community. A significant difference between these proportions could suggest to the Tribunal that discrimination is more likely to have happened.

Possible but strictly limited exceptions where applicants can be chosen on grounds of sex, sexual orientation, religion, race or age.

Whilst direct and indirect discrimination are generally prohibited, the legislation accepts that in some occupations it may be necessary to be of a particular sex, sexual orientation, religion, racial group or age. These limited exceptions are referred to as being Genuine Occupational Reasons (GORs) (there are no such exceptions for disability). None of the legislation actually allows discrimination to be used to maintain a balance between the sexes, the religious or the racial mix.

If a discrimination claim is brought, the burden of proof is on the employer to prove there is a GOR. You must decide whether a GOR exists before advertising the job. All roles in an organisation must be considered separately; if there is a GOR relating to one role, it will not necessarily apply to all roles within the organisation.

GORs should be reviewed each time the job becomes vacant, as circumstances may change. If only a few tasks require that the employee have a particular characteristic, you should consider whether duties could be reallocated so to other employees who do meet the requirement.

Examples of GOR’s in relation to varying types of discrimination are as follows:

Sex

• physiology – for example in modelling
• decency or privacy – where there is likely to be physical contact between the job holder and persons of the opposite sex to which the latter might object such as lavatory attendants – care needs to be taken here if there are a number of posts meaning that such contact would not necessarily happen
• single sex establishments – such as prisons
• working outside the UK
• where a job involves living in and the premises which are available do not allow for appropriate privacy or decency – again care needs to be taken as the GOR will not be upheld if the employer could reasonably be expected to make suitable facilities available
• personal services such as welfare/personal/educational where these can best be provided by a man or woman – this GOR is used by social services and welfare providers.

Religion or Belief

• A hospital wishes to appoint a chaplain to minister the spiritual needs of the patients and staff. The hospital is not a religious organisation but decides a chaplain ought to have a religion or similar belief. The hospital may be able to show that it is a GOR within the context of the job for the post holder to have a religion or similar belief
• A Christian school may be able to show that being a Christian is a requirement of the teachers whatever subject they teach.

Sexual Orientation

A scenario whereby a business advertising an opportunity to work in a middle eastern country. Because gay sex (even between consenting adults) is criminalised in that country, the business may be able to demonstrate it is a GOR for the person taking the job not to be gay, lesbian or bisexual.

Age

Where there is a requirement for a position as an actor for an old or young part.

Race

• dramatic performance where an individual of a particular ethnic background is required
• authenticity such as the requirements for a particular modelling assignment
• ambience – such as an ethnic restaurant
• providing welfare services to people of a particular racial group, where services can most effectively be provided by a member of the same racial group due to their understanding of cultural needs and sensitivities.

Positive Discrimination

Since April 2011 Section 159 of the Equality Act 2010, permits employers to treat individuals with a protected characteristic more favourably than others in connection with recruitment or promotion . This applies only to candidates of equal merit and the more favourable treatment must enable or encourage an individual to overcome or minimise a disadvantage or participate in an activity where he or she is under-represented in that activity.

Disability

The definition of what constitutes a disability can be split into three parts:

• the employee must be suffering from a physical or mental impairment
• the impairment must have a substantial effect on the ability to carry out normal day-to-day activities, which would include things like using a telephone, reading a book or using public transport. Substantial means more than minor or trivial
• the effect must be long-term, in other words have already lasted for at least 12 months or be likely to last that long.

The Equality Act 2010 includes new protection from discrimination arising from disability. This includes indirect discrimination, associative discrimination and discrimination by perception.

The meaning of disability

The Equality Act 2010 covers discrimination against disability which insists that employers may not treat a person with a disability less favourably than other persons without justifiable reasons. However, this does not apply if an employer shows that they did not know, and could not reasonably have been expected to know, that a disabled person had the disability.

The Act requires employers to make ‘reasonable adjustments’ to the workplace where these would overcome the practical effects of an individual’s disability. If an applicant for a position believes that he/she has been discriminated against they may make a complaint to an Employment Tribunal.

What are ‘reasonable adjustments’?

In this context the word reasonable means whether or not such steps would be practicable and would actually have an effect, and are reasonable given the resources of the employer. For example the local branch of Marks & Spencer would probably be expected to have more resources than would a small local retailer.

Reasonable adjustments to the workplace that employers might be expected to make include:

• transferring the individual to fill another vacancy or to a different place of work
• altering working hours
• allowing them time during working hours for rehabilitation or treatment
• allocating some duties to another person
• arranging for special training
• acquiring or modifying premises, equipment, instructions or manuals
• providing readers or supervision.

Claims against employers for discrimination

Applications can be made to an Employment Tribunal from someone who was not selected for an initial interview, for a final short-list or offered the job, and who believes it was because of age, disability, gender reassignment, race, religion or belief, sex, sexual orientation, marriage and civil partnership, trade union membership or lack of such membership. The application must be made within three months of the alleged discrimination and the Tribunal will take into account reasonable inferences from the actual employment practices of the employer as well as from the particular facts of the individual case.

How we can help

We will be more than happy to provide you with assistance or any additional information required so please do contact us.

Inheritance Tax Avoidance – Pre-Owned Assets

Inheritance tax (IHT) was introduced approximately 30 years ago and broadly charges to tax certain lifetime gifts of capital and estates on death.

With IHT came the concept of ‘potentially exempt transfers’ (PETs): make a lifetime gift of capital to an individual and, so long as you live for seven years from making the gift, there can be no possible IHT charge on it whatever the value of the gift. The rules create uncertainty until the seven year period has elapsed but, at the same time, opportunity to pass significant capital value down the generations without an IHT charge. Of course this is to over simplify the position and potentially ignore a whole host of other factors, both tax and non-tax, that may be relevant.

However many people are simply not in a position to make significant lifetime gifts of capital. There are a number of reasons for this, the most obvious being that their capital is tied up in assets such as the family home and business interests and/or it produces income they need to live on.

Gifting the family home?

But what is to stop a gift of the family home being made to, say, your (adult) children whilst you continue to live in it? The answer is simple: nothing! However such a course of action is unattractive not to say foolhardy for a number of reasons the most significant being:

• security of tenure may become a problem
• loss of main residence exemption for capital gains tax purposes
• it doesn’t actually work for IHT purposes.

The reason such a gift doesn’t work for IHT is because the ‘gift with reservation’ (GWR) rules deem the property to continue to form part of your estate because you continue to derive benefit from it by virtue of living there. This is a complex area so do get in touch if you would like some advice.

Getting around the rules

To get around the GWR rules a variety of complex schemes were developed, the most common being the ‘home loan’ or ‘double trust’ scheme, which allowed continued occupation of the family home whilst removing it from the IHT estate. For an individual with a family home worth say £500,000 the prospect of an ultimate IHT saving of £200,000 (being £500,000 x 40%) was an attractive one.

HMRC’s response

Over time the schemes were tested in the courts and blocked for the future.

However HMRC wanted to find a more general blocking mechanism. Their approach has been somewhat unorthodox with the GWR rules remaining as they are. Instead a new income tax charge is levied on the previous owner of an asset if they continue to be able to enjoy use of it. The rules are referred to as the Pre-Owned Assets (POA) rules. They are aimed primarily at land and buildings but also apply to chattels and certain interests in trusts.

Scope

In broad outline, the rules apply where an individual successfully removes an asset from their estate for IHT purposes (ie the GWR rules do not apply) but is able to continue to use the asset or benefit from it.

Example 1 Ed gave his home to his son Oliver in 2004 by way of an outright gift and Ed continues to live in the property. This is not caught by the POA rules because the house is still part of Ed’s IHT estate by virtue of the GWR rules.

Example 2 As example 1 but Ed’s ‘gift’ in 2004 was made using a valid ‘home loan’ scheme. This is caught by the POA rules because the house is not part of Ed’s estate for IHT. Even if Ed did not live in the property full-time because say it is a holiday home, the rules would still apply. If Ed had sold the entire property to his son for full market value, the POA rules would not apply, nor would the GWR rules. The rules also catch situations where an individual has contributed towards the purchase of property from which they later benefit unless the period between the original gift and the occupation of the property by the original owner exceeds seven years.

Example 3 In 2003 Hugh made a gift of cash to his daughter Caroline. Caroline later used the cash to buy a property which Hugh then moved into in 2009. The POA rules apply. The rules would still apply even if Caroline had used the initial cash to buy a portfolio of shares which she later sold using the proceeds to buy a property for Hugh to live in. If Hugh’s occupation of the property had commenced in 2011, the POA rules would not apply because there is a gap of more than seven years between the gift and occupation. There are a number of exclusions from the rules, one of the most important being that transactions will not be caught where a property is transferred to a spouse or former spouse under a court order. Cash gifts made after 6 April 1998 are also caught within the rules.

Start date – retrospection?

Despite the fact that the regime is only effective from 6 April 2005, it can apply to arrangements that may have been put in place at any time since March 1986. This aspect of the rules has come in for some harsh criticism. At the very least it means that pre-existing schemes need to be reviewed to see if the charge will apply.

Calculating the charge

The charge is based on a notional market rent for the property. Assuming a rental yield of, say, 5%, the income tax charge for a higher rate taxpayer on a £1 million property will be £20,000 each year.

The rental yield or value is established assuming a tenant’s repairing lease.

Properties need to be valued once every five years. In situations where events happened prior to 6 April 2005, the first year of charge was 2005/06 and the first valuation date was 6 April 2005. In these cases a new valuation should have been made on 6 April 2010 and 6 April 2015.

The charge is reduced by any actual rent paid by the occupier – so that there is no charge where a full market rent is paid.

The charge will not apply where the deemed income in relation to all property affected by the rules is less than £5,000.

The rules are more complex where part interests in properties are involved.

Avoiding the charge

There are a number of options for avoiding the charge where it would otherwise apply.

• Consider dismantling the scheme or arrangement. However this may not always be possible and even where it is the costs of doing so may be prohibitively high.
• Ensure a full market rent is paid for occupation of the property – not always an attractive option.
• Elect to treat the property as part of the IHT estate – this election cannot be revoked once the first filing date for a POA charge has passed.

The election

The effect of the election using the example above is that the annual £20,000 income tax charge will be avoided but instead the £1 million property is effectively treated as part of the IHT estate and could give rise to an IHT liability of £400,000 for the donee one day. Whether or not the election should be made will depend on personal circumstances but the following will act as a guide.

Reasons for making the election

Where the asset qualifies for business or agricultural property reliefs for IHT.

Where the value of the asset is within the IHT nil rate band even when added to other assets in the estate.

Where the asset’s owner is young and healthy.

Reasons not to make the election

The life expectancy of the donor is short due to age or illness and the income tax charge for a relatively short period of time will be substantially less than the IHT charge.

The amount of the POA charge is below the £5,000 de minimis.

The donor does not want to pass the IHT burden to the donee.

The election must be made by 31 January in the year following that in which the charge would first apply. In other words if it would apply for 2014/15 the election should have been made by 31 January 2016. HMRC will however allow a late election at their discretion.

What now?

The new rules undoubtedly make effective tax planning with the family home more difficult. However they do not rule it out altogether and the ideas we mention below may be appropriate depending on your circumstances.

Sharing arrangements

Where a share of your family home is given to a family member (say an adult child) who lives with you, both IHT and the POA charge can be avoided. The expenses of the property should be shared. This course of action is only suitable where the sharing is likely to be long term and there are not other family members who would be compromised by the making of the gift.

Equity release schemes

Equity release schemes whereby you sell all or part of your home to a commercial company or bank have been popular in recent years. Such a transaction is not caught by the POA rules.

If the sale is to a family member, a sale of the whole property is outside the POA rules but the sale of only a part is caught if the sale was on or after 7 March 2005. There is no apparent logic in this date.

The cash you receive under such a scheme will be part of your IHT estate but you may be able to give this away later.

Wills

Wills are not affected by the regime and so it is more important than ever to ensure you have a tax-efficient Will.

Summary

This is a complex area and professional advice is necessary before embarking on any course of action. The POA rules are limited in their application but having said that they have the potential to affect transactions undertaken as long ago as March 1986.

How we can help

Please do contact us if you have any questions or would like some IHT planning advice.

Money Laundering and the Proceeds of Crime

There are tough rules to crack down on money laundering and the proceeds of crime. These rules affect a wide range of people and we consider how your organisation may be affected.

Money laundering – a definition

Most of us imagine money launderers to be criminals involved in drug trafficking or terrorism or to be someone like Al Capone. However legislation, in the last decade, has expanded significantly the definition of what we might have traditionally considered as money laundering. While the general principles remain; money laundering involves turning the proceeds of crime into apparently ‘innocent’ funds with no obvious link to their criminal origins, what has changed is that the definition now includes the proceeds of any criminal offence, regardless of the amount involved.

The rules

The key pieces of legislation are:

• the Proceeds of Crime Act 2002 (The Act) as amended by the Serious Organised Crime and Police Act 2005, and
• the Money Laundering Regulations 2007 (The 2007 Regulations).

The Act

The Act re-defines money laundering and the money laundering offences, and creates new mechanisms for investigating and recovering the proceeds of crime. The Act also revises and consolidates the requirement for those affected to report knowledge, suspicion or reasonable grounds to suspect money laundering. See the panel below for some of the more technical terms of the Act.

The 2007 Regulations

The 2007 Regulations contain the detailed procedural requirements for those affected by the legislation. The 2007 Regulations came into force on 15 December 2007.

Proceeds of Crime Act – technical terms Under the Act, someone is engaged in money laundering if they: conceal, disguise, convert, transfer or remove (from the United Kingdom) criminal property enter into or become concerned in an arrangement which they know or suspect facilitates (by whatever means) the acquisition, retention, use or control of criminal property by or on behalf of another person or acquire, use or have possession of criminal property. Property is criminal property if it: constitutes a person’s benefit in whole or in part (including pecuniary and proprietary benefit) from criminal conduct or represents such a benefit directly or indirectly, in whole or in part and the alleged offender knows or suspects that it constitutes or represents such a benefit.

Who is caught by the legislation?

Certain businesses have been affected by anti-money laundering rules for some time, for example, banks and other financial institutions. These businesses have been required to put in place specific arrangements to prevent and detect money laundering.

The new regime requires many more businesses to introduce procedures to combat money laundering and the criminal activity that underlies it. As money launderers have resorted to more sophisticated ways of disguising the source of their funds, new legislation aimed at catching those involved has become necessary.

The regulated sector

The legislation relates to anyone in what is termed as the ‘regulated sector’, which includes but is not limited to:

• accountants and auditors
• tax advisers
• financial institutions
• credit institutions
• dealers in high value goods (including auctioneers dealing in goods) whenever a transaction involves accepting a total cash payment equivalent to €15,000 or more, whether in a single operation or in several operations that are linked
• casinos
• estate agents
• some management consultancy services
• company formation agents
• insolvency practitioners
• legal professionals

The implications of being in the regulated sector

Those businesses that fall within the definition are required to establish procedures to:

• apply customer due diligence procedures (see below)
• appoint a Money Laundering Nominated Officer (MLNO) to whom money laundering reports must be made
• establish systems and procedures to forestall and prevent money laundering and
• provide relevant individuals with training on money laundering and awareness of their procedures in relation to money laundering.

If your business is caught by the definition you may have received guidance from your professional or trade body on how the requirements affect you and your business. Those of you who are classified as High Value Dealers may be interested in our factsheet of the same name, which considers how the 2007 Regulations affect those with high value cash sales.

The implications for customers of those in the regulated sector

As you can see from the list above, quite a wide range of professionals and other businesses are affected by the legislation. Those affected must comply with the new laws or face the prospect of criminal liability (both fines and possible imprisonment) where they do not.

Procedural changes – customer due diligence (CDD)

Under The Regulations, if you operate in the regulated sector, you are required to undertake CDD procedures on your customers. These CDD procedures need to be undertaken for both new and existing customers.

CDD procedures involve:

• identifying your customer and verifying their identity. This is based on documents or information obtained from reliable and independent sources
• identifying where there is a beneficial owner who is not the customer. It is necessary for you to take adequate measures on a risk sensitive basis, to verify the beneficial owner’s identity, so that you are satisfied that you know who the beneficial owner is. The beneficial owners of the business are those individuals who ultimately own or control the business
• obtaining information on the purpose and intended nature of the business relationship

You must apply CDD when you:

• establish a business relationship
• carry out an occasional transaction (one off transaction valued at €15,000 or more)
• suspect money laundering or terrorist financing
• doubt the reliability or adequacy of documents or information previously obtained for identification.

CDD measures must also be applied on a risk sensitive basis at other times to existing customers. This could include when a customer requires a different service. Businesses must consider why the customer requires the service, the identities of any other parties involved and any potential for money laundering.

The purpose of the CDD is to confirm the identity of the customer. For the customer’s identity to be confirmed, independent and reliable information is required. Documents which give the strongest evidence are those issued by a Government department or agency or a Court including documents filed at Companies House. For individuals, documents from highly rated sources that contain photo identification, eg passports and photo driving licenses, as well as written details are a particularly strong source of verification.

The law requires the records obtained during the CDD to be maintained for five years after a customer relationship has ended.

Enhanced due diligence

Enhanced CDD and ongoing monitoring must be applied where:

• the client has not been met face to face
• the client is a politically exposed person
• there is a higher risk of money laundering or terrorist financing.

Additional procedures are required over and above those applied for normal due diligence in these circumstances.

Procedural changes – reporting

As mentioned above, the definition of money laundering includes the proceeds of any crime. Those in the regulated sector are required to report knowledge or suspicion (or where they have reasonable grounds for knowing or suspecting) that a person is engaged in money laundering, ie has committed a criminal offence and has benefited from the proceeds of that crime. These reports should be made in accordance with agreed internal procedures, firstly to the MLNO, who must decide whether or not to pass the report on to the National Crime Agency (NCA).

The defences for the MLNO are:

• reasonable excuse (reasons such as duress and threats to safety might be accepted although there is little case law in this area as yet)
• they followed Treasury approved guidance.

The Courts must take such guidance into account.

National Crime Agency (NCA)

The NCA is the UK new crime-fighting agency with national and international reach and the mandate and powers to work in partnership with other law enforcement organisations to bring the full weight of the law to bear in cutting serious and organised crime. Part of the role of the NCA is to analyse the suspicious activity reports (SARs) received from those in the regulated sector and to then disseminate this information to the relevant law enforcement agency.

The Regulations require those in the regulated sector to report all suspicions of money laundering to the NCA. By acting as a coordinating body, the NCA collates information from a number of different sources. This could potentially build up a picture of the criminal activities of a particular individual, which only become apparent when looked at as a whole. This information can then be passed on to the relevant authorities to take action.

Is your business vulnerable?

Criminals are constantly searching for new contacts to help them with their money laundering. Certain types of business are more vulnerable than others. For example, any business that uses or receives significant amounts of cash can be particularly attractive. To counter this, the Regulations require businesses that deal in goods and accept cash equivalent to €15,000 to register with HMRC and implement anti-money laundering procedures.

You can imagine that if a drug dealer went along to a bank on Monday morning and tried to pay in the weekend’s takings, the bank would notice it and report it unless the sum was relatively small. If criminals can find a legitimate business to help them by taking the cash and pretending that it is the business’s money being paid in (in exchange for a proportion!), then that business can put the cash into the bank without any questions being asked.

Take for example the mobile telephone business that has had a fairly steady turnover of £10,000 per week for the last couple of years but suddenly begins to bank £100,000 in cash each week. Without a clear, rational and plausible explanation, this type of suspicious activity would clearly be reported to the NCA.

Perhaps a less obvious example of possible money laundering could be where an individual comes into an antiques shop and offers to buy a piece of furniture for £12,000 in cash. Not too many sellers would have insisted upon a cheque in the past! This person may be a money launderer who then goes to another shop and sells the antique for say £8,000, being quite prepared to suffer the apparent loss. This time the criminal asks for a cheque that can then be paid innocently into a bank account, making the money look legitimate.

The legislation aims to put a stop to this type of activity. Those in the regulated sector are required to report any transactions that they have suspicions about. Also, it is not simply the more obvious examples of suspicious activities that have to be reported. For the majority of those regulated, the government has insisted upon there being no de minimis limits within the legislation. This means that very small proceeds of crime have to be reported to the NCA.

Tipping off

There is also an offence known as ‘tipping off’ under the Act. This is what would happen if a person in the regulated sector were to reveal that a suspicious activity report had been made, say for example about a customer, to that customer. Where this disclosure would be likely to prejudice any investigation by the authorities, an offence may be committed. A tipping off offence may also be committed where a person in the regulated sector discloses that an investigation into allegations that a money laundering offence has been committed is being contemplated or carried out and again that this disclosure would be likely to prejudice that investigation. As you can imagine therefore, if you were to ask an accountant or estate agent whether they had made any reports about you, they would not be able to discuss this with you at all. If they did, they could break the law and could face a fine or imprisonment or both.

How we can help

The legislation brings a number of professions and businesses into the regulated sector. Complying with the requirements of both the Act and the 2007 Regulations requires those affected to introduce a number of procedures to ensure that they meet their legal responsibilities. If you would like to discuss how the legislation could affect you and your organisation please do contact us.

Data Security – Data Loss Risk Reduction

Many companies are now completely reliant on the data stored on their network servers, PCs, laptops, mobile devices or in the cloud. Some of this data is likely to contain either personal information and/or confidential company information.

Here we look at some of the issues to consider when reviewing the security of your computer systems, and how to minimise the risks of data loss.

There have been many high profile incidents of data loss – where large volumes of personal information have found their way into the public domain.

Examples of this sort of information include health records, financial records and employee details.

A commercial organisation also faces the additional risk of data being lost to a competitor.

Obviously, the larger data losses from government and corporations has hit the headlines.

However, any company, however large or small can suffer data loss unless sensible precautions are taken.

In the past year alone, according to research undertaken by the Department for Business Innovation & Skills some 87% of small businesses have experienced some sort of security breach.

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/200455/bis-13-p184-2013-information-security-breaches-survey-technical-report.pdf

Small businesses were commonly subject to system failures and data corruption, with computer theft and fraud also featuring on the list of types of security breach.

Mobile devices in particular – which can run applications, link to corporate servers and can receive emails with corporate and personal data in the form of attachments, can be considered high risk. Firms may want to think about a BYOD (Bring Your Own Device) policy.

There are usually two ways in which data can go missing:

• an employee accidentally or deliberately loses a device, or discloses personal information
• the data is stolen through the physical theft of a device, or by electronic penetration.

Audit use and storage of personal data

Consider the potentially sensitive and confidential data which is stored by your business –

• staff records with date of birth, salary and bank account details, sickness/absence etc
• customer and supplier records with bank/credit card account details, pin numbers, passwords, transaction information, discounts and pricing, contracts information
• financial and performance data and business plans.

Confidential data is not always conveniently stored in a ‘secure’ database. Often employees need to create and circulate ad hoc reports (using spreadsheets and other documents) which are usually extracts of information stored in a database. This is quite often done at the expense of data security – as the database itself invariably will have access controls, but these ad hoc reports usually do not.

Find out what is happening to data and what controls are in place to prevent accidental or deliberate loss of this information.

Risk analysis and risk reduction

So the first key question is – If all or some of this data is lost who could be harmed and in what way?

When that is known, then steps to mitigate the risks of data loss must be taken.

So here are some steps which should be undertaken to reduce the risk of data loss –

• Undertake regular backups and store backup data off-site
• Review the type of information which is stored on devices (such as laptops, mobiles or other media) which are used off-site. If such information contains personal and/or confidential data try to minimise or anonymise the data. Ensure that the most appropriate levels of data security and data encryption are applied to this data
• If mobile devices are permitted to use company facilities ensure there is an active Bring your own Device (BYOD) policy in place
• Review the use/availability of USB, and other writable media such as Optical devices within the company and think about restricting access to these devices to authorised users only, via appropriate security settings, data encryption, and physical controls
• Ensure that company websites which process online payments have the highest levels of security. This means adopting SSL encrypted transmissions, and also testing for vulnerabilities from attacks
• Have a procedure for dealing with sensitive information and its secure disposal once the data is no longer required
• Have a procedure by which any personal/corporate data stored on mobile devices can be wiped
• Train staff on their responsibilities, the data security procedures and what they should do if data goes missing

Security breach

As well as risk reduction, it is also good practice to have procedures in place in the event a security breach occurs.

This should concentrate on four main areas –

1. A recovery plan and procedures to deal with damage limitation
2. Recovery review process to assess the potential adverse consequences for individuals, how serious or substantial these are and how likely they are, to happen again
3. Notification procedures – this includes not only notifying the individuals who have been, or potentially may be, affected. If the security breach involves loss of personal data then the Information Commissioner (ICO) should be informed. There may be other regulatory bodies and other third parties such as the police, the banks and the media who may need to be informed
4. Post-breach – ensure that appropriate measures are put in place to prevent a similar occurrence, and update procedures and train or re-train staff accordingly.

How we can help

Please contact us if you require help in the following areas:

• performing a security/information audit
• training staff in security principles and procedures