HMRC’s targeting of CFOs and FDs under the SAO regime continues to grow, with official figures indicating a 22% increase in the number of senior finance executives fined for tax accounting failures.
Introduced in 2009, the Senior Accounting Officer (SAO) guidance allows HMRC to issue penalties of £5,000 for failure to account for a company’s income and expenses according to requirements.
The rules apply to UK companies with a turnover of more than £200m or a relevant balance sheet total of more than £2bn for the preceding financial year.
Qualifying companies must designate an individual director or officer – usually the FD or CFO – to act as senior accounting officer and take full responsibility for the company’s tax accounting arrangements.
HMRC kept its powder dry for a few years after the regime was implemented. There were no fines imposed for the first three years, but since the phoney war ended in 2012, the tax authority has taken an increasingly hardline approach on the matter.
In every year since the number of fines imposed has increased – and this year is no different. The number of CFOs and senior finance directors fined has increased 22% over the last year alone, up to 152 from 125 in last year, while only 46 individuals were fined five years ago in 2012/13.
The tax authority has been criticised for its enforcement of the regime in the past. In the first tribunal decision concerning SAO penalties, the judge commented the regime shouldn’t be applied on a one size fits all basis, and a distinction should exist between businesses just over the qualifying company threshold and major companies with large and sophisticated tax departments and systems.
Despite this, HMRC has insisted that the increased numbers of fines aren’t part of a crackdown, and it is merely applying the law. But according to Pinsent Masons’ Jason Collins, who leads the law firm’s tax, regulatory and litigation teams, there’s been more active enforcement by HMRC.
“It’s not just the SAO regime where we're seeing more active enforcement,” said Collins. “It’s across the board. HMRC is definitely spending more time and money scrutinising the affairs of the UK’s biggest businesses.”
Collins also noted that the upward trend in SAO fines is unlikely to yield thanks to HMRC’s new off-payroll working rules (the rebranded term for IR35), which will be introduced in April 2020.
IR35 makes make businesses liable for determining employment status and ensuring the right amount of tax is paid by contractors who operate through limited companies. Under the SAO regime, Collins said, executives could be fined if HMRC deems that they did not have adequate controls in place to prevent de facto employees being treated as contractors.
“Some corporates will be risk-averse and put people through payroll, likely against the contractors will,” said Collins. “But the SAO regime will kick in when it's not clear that the correct arrangements were in place.”
SAOs face the unenviable task of figuring out how many contractors the company is using, and whether their classification is correct. “It’s not always easy for businesses to find out how many contractors they’re using,” said Collins.
“Not every contractor a business uses, for example, would go through central procurement. Some departments might just have third-parties they deal with directly. So an SAO is going to have a big task to get this under control.”
“That means proper, standardised tests being applied across the business, and I’m sure, in the first few years will see quite a few mistakes being made.”