Personal penalties issued to company senior accounting officers reach record levels

Out-Law News | 07 Mar 2017 | 10:02 am | 2 min. read

The number of personal penalties issued to company directors for tax accounting failures hit a record high last year, showing that HM Revenue and Customs (HMRC) is now taking enforcement seriously.

Figures obtained by Pinsent Masons, the law firm behind, showed a 17% increase in penalties issued under the Senior Accounting Officer (SAO) regime in 2015/16, up to 181 fines from 151 the year before.

Under the SAO regime, the UK's 2,000 largest businesses must appoint a named director who has personal responsibility for that company's tax accounting arrangements. The SAO, who is usually the company's chief financial officer (CFO) or similarly senior executive, can be personally fined up to £5,000 for failing to maintain appropriate tax accounting arrangements or to disclose any issues they identify to HMRC.

Tax expert Jason Collins of Pinsent Masons said that the figures demonstrated HMRC's "new enthusiasm" for holding individual senior executives to account for any wrongdoing or non-compliance. HMRC took a 'light touch' approach to enforcement when the rules were first introduced in 2009, but the number of penalties issued has sharply increased in recent years, he said.

"SAOs need to ensure that they take the process seriously and fully understand the requirements set out by HMRC," he said. "Without adequate controls, the scope for error in tax accounting is huge - all processes need to be supported by appropriate planning, risk assessment, training and testing, to help minimise the potential for mistakes."

"The systems in place to ensure tax compliance need to be as robust as possible, and stand up to challenge by the Revenue," he said.

The SAO regime applies to UK businesses with either £200 million turnover or £2 billion balance sheet total for the preceding financial year. For corporate groups, each company within the group that meets these thresholds must comply individually. The nominated SAO must ensure that the company's accounting arrangements are 'adequate', meaning that they enable all relevant tax liabilities to be calculated accurately in all material respects.

Under the regime, the SAO risks a potential HMRC fine in two circumstances: firstly, for failing to take steps to ensure that the accounting arrangements are adequate; and secondly, for failing to provide a certificate either confirming that the arrangements are adequate or disclosing details of the deficiencies for the relevant financial year. The figures also include penalties issued to businesses that failed to inform HMRC of the name of their nominated SAO.

Tax expert Jason Collins said that large businesses were increasingly becoming "expected to take responsibility for the practices of their staff and supply chains". A new criminal offence of failure to prevent facilitation of tax evasion, included in the Criminal Finances Bill, will require companies to risk assess whether their staff and other 'associated persons' could be facilitating tax fraud by customers and suppliers.

"The risks to corporates and their senior executives are on the rise," Collins said.

"Management need to ensure that their risk assessment extends to cover staff throughout the organisation – and wider supply chain. HMRC will hope that corporates may go further and start thinking about whether they are doing things which facilitate aggressive avoidance, as opposed to evasion, and whether they should stop this to avoid risks to their reputations," he said.