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Tribunal wipes out first senior accounting officer penalties

15th Aug 2017
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The first tier tribunal has cancelled penalties levied on the finance director of group of companies after HMRC failed to establish that he had breached his duty as a senior accounting officer.

In the first tribunal decision concerning senior accounting officer (SAO) penalties Kreeson Thathiah, the finance chief of a group of companies owned by International Currency Exchange (ICE), successfully overturned two £5,000 penalties levied on him by HMRC.

The case hinged on whether Thathiah had taken reasonable steps to ensure his company established and maintained appropriate tax accounting arrangements, in particular relating to issues around the firm’s VAT returns between 2010 and 2014.

HMRC argued that Thathiah had breached the main duty of an SAO by failing to conduct or have in place any system of, selective or ‘thematic’ testing or sampling of figures in the returns, but Judge Sarah Falk overturned the levies and criticised HMRC’s handling of the case.

Commenting on the case Heather Self, tax partner at Pinsent Masons, said that the penalties seemed to have been “almost automatically” imposed, without consideration for the circumstances and without applying the proper tests.

What is an SAO?


The senior accounting officer (SAO) guidance came into force in July 2009 with the aim of increasing the focus on tax in company boardrooms and ensuring businesses have robust tax accounting and governance systems in place. 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 other similar 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.

Earlier this 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.

‘Reasonable steps’

Thathiah had provided SAO certificates for ICE for several years. After leaving the company the group's tax advisers KPMG informed HMRC of errors they thought had been made in the VAT returns for one of the group’s companies representing VAT underpayments of around £1.36m. These errors gave HMRC reason to believe the SAO had failed in his duties, and they imposed two £5,000 SAO penalties for the periods Thathiah had provided SAO certificates.

In justifying the penalties to the tribunal, HMRC argued he had breached his SAO duty by failing to put in place a system for selective testing or sampling of figures in the company’s VAT returns to ensure the figures were correct, and that he relied excessively on comparing figures with those in previous returns. Thathiah argued that he had done what he could with the resources available to him.

Overturning the penalties, Judge Sarah Falk commented that HMRC had incorrectly focused on whether Thathiah had a reasonable excuse for the failure, rather than whether he had breached his main duty by failing to ensure that the company established and maintained appropriate tax arrangements.

Judge Falk said that the test of whether there had been a breach of the duty is not an absolute one. “Errors may indicate that appropriate tax arrangements do not exist, but do not necessarily mean that there has been a failure to take reasonable steps”, she said.

“The question of whether the appellant took reasonable steps is clearly an objective one, which in my view must be determined by reference to all the circumstances”.

Significant distinction

Judge Falk commented that the decision to trigger SAO penalties should take into account the small scale of the business and the limited resources available. 

“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 also stated that there is 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.

Thathiah relied on detailed work undertaken by KPMG several years before the disputed returns were filed, to agree a new VAT partial exemption method, checks carried out as part of the firm’s audit work as well as the involvement of an HMRC VAT specialist in reviewing information after the partial exemption method was agreed. This, according to the judge, did not amount to a failure to take reasonable steps.

 “It needs to be borne in mind that the group is privately owned, and in those circumstances the reality is that even an individual with as senior a position as group finance director may well have less real ability to control matters and ensure adequate resource than his or her equivalent in a publicly owned group.”

Taxpayer confidentiality

The judge also expressed concerns about HMRC's handling of the case. She said the HMRC’s refusal to provide Thathiah with any details of the contents of KPMG’s error correction notice until it was provided as an exhibit to a witness statement during the course of the appeal appeared “unfair” to him, despite HMRC’s concerns around taxpayer confidentiality.

Pinsent Masons’ Heather Self said: “The case highlights the difficulties an SAO can face if they have left a group before errors come to light. Without access to information from the company or from HMRC about the errors identified, it is extremely difficult for a former SAO to contest financial penalties which could also adversely affect future employment prospects.”

"Anyone leaving a group after having been an SAO should take legal advice about how they can protect their position should some irregularity come out of the woodwork in the future,” she said.

Replies (7)

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By Justin Bryant
17th Aug 2017 15:43

Yes; but although he won, this bloke has had his name dragged though the mud hasn't he, with all the inconvenience, stress, hassle and expense of a hearing so he has effectively lost for that reason and his name is now permanently on the internet (and easily found on Google due to it being an unusual name) and a lot of people see no smoke without fire etc. and he would probably be happy to pay £5k just to not have that problem (for the rest of his life). This is the problem with being wrongly accused in our justice system (without anonymity) and then found not guilty with so much accessible information in the public domain. A bit like that bloke wrongly accused of pushing a women under a bus the other day, who I'm sure now has to deal with loads of hate emails etc.

See other bad examples here:

Thanks (5)
By D V Fields
15th Aug 2017 20:47

It would be good if HMRC had to have an equivalent such that if that individual recklessly and wrongly pursued an individual whether through negligence, malice or pure stupidity then they should be fined. Might make them think.

Thanks (4)
Replying to D V Fields:
By Springfield
17th Aug 2017 11:21

I would like to see a Double Jeopardy rule brought in so that, in any case where HMRC penalties were overturned, HMRC had to pay double the amount of the wrongful penalty to the other side.
This would concentrate their minds before imposing any penalties - at the moment there is no downside risk to HMRC of a bad assessment.

Thanks (3)
Replying to Springfield:
By chatman
17th Aug 2017 11:39

I thought double jeopardy meant something completely different, but I quite agree anyway.

Thanks (1)
Replying to chatman:
By Brend201
17th Aug 2017 11:46

You are right, it does. And I agree too.

Thanks (2)
By The Black Knight
17th Aug 2017 11:57

Thank goodness for the rule of law. Providing you have the resources to defend yourself.
It is typical HMRC to just bully their way through.
If he was proper criminal they would have deliberately failed to notice report or not.

Thanks (0)
By Justin Bryant
17th Aug 2017 13:25

What's also disconcerting in this case is that KPMG made a voluntary VAT underpayment declaration for c£1m to HMRC and if the error had been identified 4 years later the 4 year VAT cut-off deadline for non-deliberate/reckless underpayments would have saved that c£1m i.e. this is the thanks you get from HMRC for being honest and fessing up to such (unprompted) errors quickly.

A bit like the thanks that accountant got for making a SAR re that VAT fraud matter on the telly the other night.

Thanks (1)