Two £5,000 penalties for breaking SAO rules
Castlelaw (No.628) Ltd (Castlelaw), a dormant company along with Mrs Douglas, the senior accounting officer (SAO), appealed to first tier tribunal (FTT) against the two £5,000 penalties issued under FA 2009 sch 46 'Duties of Senior Accounting Officers of Qualifying Companies'.
The SAO regime
The SAO regime applies to UK incorporated companies with a turnover of more than £200m or a relevant balance sheet total of more than £2bn for the preceding financial year. Notification to HMRC detailing who the SAO is must be made by the qualifying company, which can include a dormant company even with no tax liabilities which is a member of a group that meets the above criteria.
A dormant company with no tax liabilities can fall within the SAO regime even if there are no accounting arrangements required. Castlelaw was part of DC Thomson and Company Ltd (the group) of nearly 100 other companies.
The role of an SAO
The individual should take reasonable steps to ensure the company establishes and maintains appropriate tax accounting arrangements, which includes maintaining accounting records and to accurately calculate the company's relevant liabilities. The SAO will monitor accounting arrangements and identify inappropriate ones. The annual certificate will detail whether appropriate tax accounting arrangements had been achieved including any shortcomings.
Relationship with HMRC
The group was part of the SAO regime since its introduction in 2009. Douglas maintained regular communications with the customer relationship manager from HMRC, to have a framework of openness and collaboration and to reduce the level of tax compliance risk.
The group has nearly 100 companies and five SAO's. Douglas was the SAO for 33 companies as well as the group SAO. Castlelaw was one of 20 dormant companies within the group.
Omission of the company and SAO
In October 2016 the group organisation chart supplied by Douglas to HMRC failed to specify four companies (two dormant), including the Castlelaw. Douglas explained that when preparing the chart the company had inadvertently been removed. After HMRC highlighted this in January 2017, a revised group chart was supplied in April 2017. This was the first time that omissions had been made for the company and SAO.
HMRC stated that a comparison of the previous year’s notifications would have highlighted the missing companies.
The FTT hearing had to determine whether the penalties were correct according to the legislation for both the company and SAO. If the penalties were issued correctly, the Judge needed to establish whether there was a valid reasonable excuse regarding the failures. The excuses provided included:
- the dormancy of the company;
- the amount of penalty levied was disproportionate, and
- the innocent oversight.
HMRC stated that the notification and certificate were not submitted on time after the failure was identified. In a previous upper tier tribunal case it was determined that a delay of around two months was seen as not remedying the failure without unreasonable delay after the excuse ceased.
The notification failed to report four companies (two were outside of the regime). In a group situation, within the regime it is not possible to issue more than one penalty per SAO or group for failure across all the group companies.
The Judge compared the penalty regime to other regimes and highlighted the differences with SAO:
- the penalty assessed under SAO is discretionary.
- the penalty is fixed at £5,000 and any changes is vested with the Treasury.
- there is no provision for a special reduction.
The only discretion HMRC can exercise is whether to assess the SAO penalty even if the conditions to assess have been met.
The conditions within the SAO regime were met, therefore HMRC had the discretion to levy the fixed penalties. The Judge felt there was no reasonable excuse for the omission of the company and upheld the penalties.
Points to takeaway
There is a great deal of empathy for those involved with maintaining group structures; however, this case highlights the importance of carefully reviewing group structures and carrying out comparisons to previous years. Reaction to any omissions should be made as soon as possible to HMRC. This is certainly not the first SAO penalty and it won’t be the last.
An HMRC spokesperson said: “SAO penalties help ensure tax is on the boardroom agenda and promote responsible management of tax. We want to make sure tax compliance is given proper attention by a senior officer of the company. Penalties are a deterrent to qualifying companies and SAOs failing to comply with the annual requirements of the SAO provisions.”
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Reshma Johar is a Tax Consultant at Carter Backer Winter. She is both ATT and CTA qualified with experience gained from practice and her involvement with the CIOT. She has a particular interest in OMB and private client taxes.