According to Deloitte´s quarterly CFO survey, the concerns of CFOs in the UK about the impact Brexit will have on the future business environment are easing.
In June last year, citizens of the United Kingdom voted narrowly to exit the European Union. The decision to leave – termed “Brexit” – created a sense of uncertainty across the business environment not only for companies in the UK, but also for companies within the EU and those who trade with the EU.
However, in Deloitte´s Q1 2017 CFO survey, financial concerns appear to be softening. 20% of the 130 CFOs surveyed were more optimistic about the financial prospects for their companies than they were three months ago, and there was a significant shift in focus from defensive strategies to expansionary strategies.
Expand while Credit Conditions Remain Benign
One of the reasons for the shift in focus is that credit remains cheap and easily available – although there is uncertain confidence it will remain that way after the United Kingdom leaves the European Union. The surveyed CFOs said that debt finance remained the most attractive source of funding for the present, and that equity issuance has become more appealing as the result of stronger equity markets.
In relation to the cost of borrowing, most CFOs expect the current Bank of England base rate to increase from 0.25% to 0.50% within a year – although some believe it could reach 1.25% even before the full implications of Brexit are known. Because of the expected increase in the cost of borrowing, the majority of respondents to the survey expressed an opinion that operating margins would fall over the next twelve months.
Researchers Identify Decline in the Perception of Risk
In each quarterly survey, researchers ask CFOs for their perception in risk in eight key areas. In six of the eight key areas – the impact of Brexit and subdued domestic demand among them – Deloitte reported a decline in the perception of risk. The two areas in which the perception of risk had increased were:
- The prospect of higher interest rates and a general tightening of monetary conditions in the UK and US.
- A bubble in housing and/or other real and financial assets and the subsequent risk of higher inflation.
David Sproul, Senior Partner and chief executive at Deloitte, remarked: “The UK’s exit from the EU is a long and uncertain process and business sentiment is changeable. But it is clear from this survey that the UK corporate sector enters the negotiation phase of Brexit in far better spirits than seemed likely in the months after last year’s referendum vote.”
Changes to how the R&D tax credit is applied could have beneficial implications for companies of all sizes – provided they keep their documentation in order.
The Protecting Americans from Tax Hikes Act changed the way the R&D tax credit is applied. Effective for 2016 tax returns, companies that invest in research and development can factor a federal income tax reduction into their financial planning – rather than having to apply for it retrospectively – as the R&D tax credit is now a permanent fixture.
The changes to how the R&D tax credit is applied will save hundreds of thousands – or even millions of dollars – for companies of all sizes, and it is important to note that the credit is not limited to companies with recognized R&D departments. Any company that develops or improves products, software or processes could qualify subject to meeting the qualifying criteria.
Does Your Company Qualify for an R&D Tax Credit?
The qualifying criteria is vague and open to interpretation. It is suggested that any company that develops or improves products, software or processes seeks professional tax advice to ensure they qualify for the R&D tax credit, as this is one of the areas that comes under scrutiny during IRS audits. However, to be in the right area for a tax credit, a company has to invest in one of the following activities:
- Technological experimentation in the fields of engineering, physics, chemistry, biology, or computer science.
- The creation of a new or improved product or process that results in increased performance, function, reliability, or quality.
- The elimination of a technical uncertainty about the development or improvement of a product or process.
- Activities undertaken to eliminate or resolve a technical uncertainty that involve an evaluation of alternative solutions.
Costs that can be included in a tax return include salaries to employees involved in research and development, their managers and support staff. Related procurement, legal and computer leasing costs – including cloud computing services – can be included, as can a portion of payments made to U.S.-based contractors. Again, seek professional tax advice that relates to your specific circumstances.
If eligible, companies can claim the R&D tax credit retrospectively for the past three years (longer in some states with an extended tax statute) and carry forward credits if they have a zero tax liability or have previous made a loss. However, immutable documentation must be used to support the credit is essential, and it may save future headaches if you seek advice about what documentation is acceptable to support your claim.
Results from several recent surveys suggest the role of the CFO is changing and expanding into new challenges such as cybersecurity and event response.
Following a tumultuous end to 2016, the business world is becoming more accustomed to unpredictability. Although there is reason to be cautious about what events will hold for CFOs during the remainder of 2017, there is also reason to be optimistic. A likely cut in corporation tax should bring a welcome boost to business, while technological advancements should help business leaders be better prepared for future unpredictability.
However, technological advancements alone will not enable a business to manage its way through a changing landscape, and CFOs – having the responsibility to ensure the financial stability of their companies – are having to step up and tackle many non-financial challenges such as HIPAA compliance and GDPR compliance. Indeed, according to one study by Adaptive Insights, 76% of CFOs report their finance teams track some non-financial KPIs today, and 46% of CFOs anticipate that number will increase in the next two years.
Cybersecurity the Biggest Challenge
As CFOs control the most sensitive data within companies, it could be argued it is the CFOs responsibility to control how the sensitive data is protected. Managing cybersecurity threats is a whole-of-company challenge but, as the finance function becomes more business-centric, CFOs are drawing on their risk management know-how and becoming more involved in risks assessments, addressing vulnerabilities, and breach recovery planning.
An increasing number of CFOs have been involved in cybersecurity since the Framework for Improving Critical Infrastructure Cybersecurity Version 1.0 was released in January 2014 and, in a recent Grant Thornton survey of 912 CFOs, 38% of respondents identified the CFO as the position most often responsible for cybersecurity, while 44% of finance leaders said they felt the most significant concern for their organization today is cybersecurity. 57% said undetected breaches were what worried them the most.
Adopting to Technology for Event Response
In addition to cybersecurity governorship, CFOs are having to educate themselves about technological advancements to help them measure and monitor business performance in a timely manner, without exposing the business to risk, but enabling it to take advantage of every possible opportunity. The technology allowing data to be processed in real time can help with identifying risks at an earlier stage and better decision-making, but many CFOs are encumbered by legacy systems that do not allow reporting teams to extract forward-looking insight from large, fast-changing data sets.
This challenge, and trends towards zero-based budgets and rolling forecasts, mean that CFOs have to be more agile. No longer is it enough to put an annual plan together and crunch the numbers month by month. EY’s DNA of the CFO survey reinforced this perception of a CFOs changing role when respondents to its survey said that skills that can help inspire and generate loyalty such as empathy, innovation and imagination becoming equally important as those used to manage finance teams.
The IRS has issued further warnings to payroll and human resources professionals to beware of tax season phishing scams requesting details of company employees.
Despite tax season phishing scams receiving a high profile last year, the IRS has seen a 400 percent surge in phishing and malware incidents so far this tax season – many of the scams targeting payroll and human resources professionals to obtain employee data.
The IRS Criminal Investigation department is reviewing multiple cases in which scammers have tricked people into revealing sensitive data that the criminals can monetize by filing fraudulent tax returns for refunds. The emails appear to come from a high ranking executive and request a list of employees including their Social Security numbers. The IRS released details of three typical tax season phishing scams:
- Kindly send me the individual 2015 W-2 (PDF) and earnings summary of all W-2 of our company staff for a quick review.
- Can you send me the updated list of employees with full details (Name, Social Security Number, Date of Birth, Home Address, Salary).
- I want you to send me the list of W-2 copy of employees wage and tax statement for 2015, I need them in PDF file type, you can send it as an attachment. Kindly prepare the lists and email them to me asap.
Scammers Targeting Entities outside the Corporate World
The tax season phishing scams are not exclusively targeted towards corporate organizations with large payrolls. In one case being investigated by the IRS, the payroll of the Virginia Wesleyan College was disclosed to an unauthorized third party by a college employee who believed the phishing email was a legitimate internal request. On discovery of the disclosure, college officials immediately notified the FBI, IRS, state taxing authorities, and affected employees.
Within a month – although not promoted by the Virginia Wesleyan College incident – Governor Terry McAuliffe approved amendments to the state’s data breach notification statute. The amendments require employers and payroll service providers to notify the state’s Office of the Attorney General after the discovery of a breach of computerized employee payroll data that compromises the confidentiality of such data. Notification is required even if the breach does not otherwise trigger the statute’s requirement that the employer or payroll service provider notify residents of the breach.
The IRS is warning employers to be aware of a new development in a W-2 phishing scam that combines employee data theft with bogus wire transfers.
The W-2 phishing scam – in which fake emails request details of all employees and their Forms W-2 – first appeared during last year´s tax season. Its objective is to collect data that will assist criminals in committing identity theft and filing fake tax returns.
Due to a greater awareness of the W-2 phishing scam within the corporate world – and more safeguards being introduced to identify phishing emails – the IRS reports that many attempts to scam large-scale employers have been unsuccessful. However, criminals are now targeting other sectors such as school districts, tribal organizations and nonprofits.
The new development the IRS wants employers to share with HR and Finance professionals is that cybercriminals are following up their W-2 phishing scam with a further email requesting a wire transfer to a certain account. Some companies have lost thousands of dollars in addition to disclosing their employees´ tax details as a result of this scam.
How to Report a W-2 Phishing Scam
In order to protect themselves against data theft and financial loss, the IRS is urging all employers to create an internal policy on the distribution of employee W-2 information and conducting wire transfers. Employers are also being asked to forward emails identified as W-2-related scams to firstname.lastname@example.org with “W2 Scam” as the subject of the forwarded email.
In the event that a W-2 phishing scam is successful, the IRS wants employers to report the theft immediately to the Internet Crime Complaint Center, while employees whose identity may have been stolen (usually apparent when a tax return is rejected because of a duplicated Social Security number) should review the actions recommended by the Federal Trade Commission at www.identitytheft.gov.
IRS Commissioner John Koskinen described the W-2 phishing scam as one of the most dangerous scams he had seen in a long time. He said: “It can result in the large-scale theft of sensitive data that criminals can use to commit various crimes, including filing fraudulent tax returns. We need everyone’s help to turn the tide against this scheme.”