HMRC has fined 115 finance directors and other senior finance executives in the last year for failings in their company’s accounts, according to research by the law firm Pinsent Masons.
Introduced in 2009, the Senior Accounting Officer (SAO) guidance allows HMRC to issue penalties of £5,000 for failures 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 another senior executive – to act as senior accounting officer and take full responsibility for the company’s tax accounting arrangements.
Under the guidance fixed penalties of £5,000 are charged to either the company or the designated individual if they fail to meet their obligations. The guidance aims to ensure that businesses have robust tax accounting and governance systems in place.
Last year, AccountingWEB reported a surge in the number of actions taken by HMRC against senior finance executives with penalties for tax accounting failures rising to a record high.
“By fining individuals, HMRC is setting an example that finance directors are not safe from fines if there are errors in a company’s tax affairs,” said Jason Collins, a partner at Pinsent Masons.
HMRC has received criticism for its enforcement of the SAO regime. In the first tribunal decision concerning SAO penalties which happened last year, the judge said the regime shouldn’t be applied on a one size fits all basis.
“The matters to take into account will include the size, complexity and nature of the business,” she said. “In my view [this] must also include matters more closely related to the role of the individual in question, such as the resources available to that individual and his or her authority to bring about any required change.”
The judge noted there’s a “significant distinction” between a company with a small finance team that is just over the qualifying company threshold and major financial institutions with large and sophisticated tax departments and systems.
The FD in that particular case managed to overturn the two fines levied on them.
Failure to take reasonable care
It was also reported that the UK’s largest businesses were hit with £59m in fines by HMRC in the last year (year-end December 31) for ‘careless’ behaviour in their tax affairs.
HMRC imposed the fines on businesses under the Large Business Directorate (LBD) for ‘failure to take reasonable care’ to ensure all information given is correct. The LBD oversees the tax compliance of 2,100 of the UK’s largest and most complex businesses.
Fines levied for ‘careless’ behaviour can be costly. If an error is first discovered by HMRC, the minimum fine is 15% of the additional tax HMRC believes it is owed, with a maximum amount of up to 30%.
HMRC issued a total of 199 fines for failure to take reasonable care in 2017, meaning on average each fine was for over £3.1m.
About Francois Badenhorst
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