FTT upholds appeal against Senior Accounting Officer penalties

Sat 02 Sep 2017

The First tier Tribunal (FTT) has allowed an appeal against two £5,000 penalties assessed under the Senior Accounting Officer (SAO) rules for the years ended 29 February 2012 and 28 February 2013.

The SAO rules (FA 2009 Sch46) require an SAO to take reasonable steps to ensure that a company establishes and maintains appropriate tax accounting arrangements.

Although the case does not set a precedent, it does provide guidance on what the FTT will consider ‘reasonable steps’ . The case summary appears to indicate there may be different expectations depending on the characteristics of the group and its in-house tax department. It is also an insight into HMRC’s increasingly tough stance on SAO compliance, though in this instance they misdirected themselves on the test against which compliance should be measured.  This potentially puts former SAOs who have left their employer in a difficult position

Background

The penalties were levied against the individual who was the finance director (FD) and SAO of the Lenlyn group of companies at the relevant time, but who left the group in May 2014, prior to the penalties being raised. The group is privately owned and at the relevant time included International Currency Exchange plc (ICE). Its activities included the provision of currency exchange and other financial services and it was the representative member of a VAT group operating a partial exemption special method (PESM) for determining recoverable input tax.

The FD had provided SAO reports in respect of ICE for the relevant years in question, which did not identify errors highlighted in the review subsequently undertaken by the firm’s adviser (who were also the firm’s auditor). The PESM had been negotiated and agreed using the same adviser in 2010. The FD had taken the adviser’s work as a starting point and undertaken variance testing from there, combined with checks of major expenses, a specific procedure for new items and testing by advisers as part of their audit work

Following the FD’s departure, an error correction notification was made on behalf of ICE, providing details of errors of around £1.36m that the advisory firm considered had been made in ICE’s VAT returns between March 2010 and January 2014.

HMRC considered the SAO had failed to conduct, or have in place any system of, selective or “thematic” testing or sampling of figures in the ICE VAT returns or of individual transactions to ensure that the figures in the returns were correct, and that he instead relied excessively on variance testing, i.e. simply comparing figures with those in previous returns. By not undertaking any selective testing, HMRC considered that consistent errors would not be picked up and could become embedded and consequently the FD had not complied with the SAO rules. It was evident that, had he been given the opportunity, the FD would have challenged the error correction notice.  He considered that those instructing the adviser to review the VAT position, and those undertaking the review work, had an insufficiently in-depth understanding of the business, its PESM, and did not engage properly with the business and how it worked.

The legislation

The SAO rules (FA 2009 Sch46) require an SAO to take reasonable steps to ensure that a company establishes and maintains appropriate tax accounting arrangements. The SAO must in particular, monitor the accounting arrangements of the company and identify (through an annual report) any respects in which those arrangements are not appropriate tax accounting arrangements.  There is a £5,000 penalty if there is a failure on the part of the SAO to comply with this duty.

The FTT’s consideration of the issues

The FTT considered that establishing whether an individual has taken reasonable steps to ensure the company has established and maintained appropriate tax accounting arrangement was not an absolute test, but a requirement to consider whether reasonable steps had been taken. In their view, it is not the case that the existence of even material or repeated errors necessarily signals that the SAO main duty has been breached.

The FTT considered that the procedures operated by the finance director at the relevant time, taking account of the particular circumstances, amounted to ‘reasonable steps’. The particular circumstances included the fact that the group was privately owned and in addition, that the finance director had raised concerns over internal resource with the company’s Board of Directors (as had the auditors), maintained an open relationship with HMRC, and engaged the company’s advisers for various VAT reviews during his tenure.

• To discuss your group’s compliance with the SAO rules and other large company tax administrative obligations, please contact a member of the Mazars corporate tax team.