The number of penalties issued personally to finance directors and chief financial officers at large companies by the UK’s HM Revenue & Customs (HMRC) has dropped from 148 to just 20 in the year to 31 March 2021, according to figures obtained by Pinsent Masons, the international law firm.
Jake Landman, a tax disputes expert at Pinsent Masons, said that part of this reduction will be down to “HMRC diverting resources to more pressing areas, such as furlough fraud”, but said HMRC has also been “taking a more selective approach to fining finance directors” after a tax tribunal case confirmed that it has a discretion as to whether to assess a penalty for senior accounting office breaches.
UK companies with a turnover on a group basis or individually of more than £200 million and/or a balance sheet total of more than £2 billion must appoint an individual to be their senior accounting officer (SAO). The SAO must ensure the company establishes and maintains appropriate tax accounting arrangements to allow tax liabilities to be calculated accurately. Each financial year a qualifying company must notify the name of its SAO to (HMRC).
The SAO must give a certificate to HMRC each financial year stating whether the company had appropriate tax accounting arrangements. If the company did not have appropriate tax accounting arrangements, they must also explain what the shortcomings were. SAOs can incur personal fines if they fail to comply with their obligations.
“Given the complexity of many large businesses it is quite a task for an SAO to keep on top of all tax compliance,” Landman said. “That’s why we have seen an average of over 130 SAOs being hit with these fines every year and over 560 in the last five years.”
“Some SAOs have felt that being personally fined for a breach of the tax rules they didn’t know about is unfair. However, HMRC see it is way of forcing senior executives to take more personal responsibility for tax compliance, with a fine levied against an individual director acting as more of a deterrent than simply fining the overall business,” he said.
HMRC amended its internal guidance on SAO penalties in March 2021 following a tax tribunal decision in January 2020 which concerned an accidental failure to notify an SAO or provide a certificate in relation to a dormant company in a group of over 100 companies. Although the tribunal judge found that HMRC was authorised to issue the penalties concerned and he could not interfere in HMRC’s decision to issue them, she pointed out that HMRC had a discretion and suggested that in exercising the discretion HMRC should consider factors including the previous compliance history of the group, its risk rating, and the fact that the companies concerned were dormant with no tax liabilities or reporting requirements.
Following the case HMRC amended its guidance to now read: "A decision to assess an SAO penalty in a particular case should not only consider whether an SAO or company is strictly liable to a penalty, but also take account of the nature of the failure in question, the level of tax risk, whether the failure is symptomatic of any underlying weakness in tax accounting arrangements, and overall compliance including compliance with the SAO regime.”
According to HMRC guidance, HMRC will "not normally seek to assess penalties where a group of companies or an SAO omitted details of dormant companies where a risk assessment indicates minimal requirement for tax accounting arrangements". However, HMRC will only consider a company to be dormant for these purposes if it has no profits or income and no assets capable of producing profits, income or gains.
Although HMRC’s guidance was only amended in March, Landman said it is likely that HMRC started to change their approach to SAO penalties prior to publishing the amended guidance.
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