Personal liability of senior accounting officers

Finance Act 2009 saw the introduction of provisions imposing new duties on senior accounting officers (SAOs) of large qualifying companies and, shortly thereafter, HMRC published guidance on the operation of this regime.

The introduction of these duties provoked much initial comment. Perhaps, most controversially, the duties are backed up by the sanction of personal penalties in order no doubt to concentrate minds and encourage compliance. The purpose of the regime is to ensure that large companies apply the necessary resources and procedures to the management of the tax compliance function.

Despite HMRC assertions to the contrary, the obligations imposed are potentially onerous and are likely to be approached with a degree of caution by many of those affected. Set against a background of an increasingly complex and unwieldy tax system, these provisions have unsurprisingly caused considerable concern, not least to those on whom duties are imposed. We recap briefly below on the provisions themselves.

The duties

The main duty an SAO will have is to take reasonable steps to ensure that the company and its subsidiaries establish and maintain appropriate tax accounting arrangements. An SAO will be the director or officer who has overall responsibility for the company's financial accounting arrangements – normally this will be the finance director who will typically take responsibility for the principal company in a group and its subsidiaries. In addition, the SAO must monitor the tax accounting arrangements and identify any respects in which they are not appropriate tax accounting arrangements. The SAO must provide a Type A or Type B certificate for each financial year. A Type A certificate certifies that the company and its subsidiaries had appropriate tax accounting arrangements throughout the financial year. A Type B certificate is appropriate where accounting arrangements have not been appropriate throughout the financial year and must give an explanation of the respects in which the arrangements were not appropriate.

Appropriate tax accounting arrangements are "accounting arrangements that enable the liability to taxes and duties of the company and its subsidiaries (if any) to be calculated accurately". It includes arrangements for keeping accounting records and extends to all of the following taxes:

• corporation tax;
• VAT;
• PAYE (not including other employer responsibilities administered by HMRC such as NICs and student loans);
• insurance premium tax;
• stamp duty land tax;
• stamp duty reserve tax;
• petroleum revenue tax;
• customs duties; and
• excise duties (including air passenger duties).

Taxes not mentioned above are excluded. These include construction industry scheme compliance, environmental taxes such as aggregates levy and tax deducted on manufactured overseas dividends.

Penalties

The SAO is potentially liable to penalties. The SAO is liable to a £5,000 penalty for failing to take reasonable steps to ensure that the accounting arrangements are appropriate and a further penalty of £5,000 for failing to provide a Type A or Type B certificate or for providing an incorrect certificate where the inaccuracy is careless or deliberate. Any inaccuracy that was not careless or deliberate can become so if an SAO discovers it sometime later and does not take reasonable steps to inform HMRC. The maximum aggregate penalty is therefore £10,000 regardless of the number of companies that the SAO is responsible for. The company itself also has to notify HMRC of the name of the SAO or SAOs in any financial year and is subject to a penalty of £5,000 for failing to do so.

Companies that are within the regime

The first step for companies is to establish whether or not they fall within the regime. Only large companies are within the regime – those companies with a turnover in excess of £200m or assets exceeding £2bn. Where a company is a member of a group, the test is applied on a group basis – for this purpose a group is a principal company and its 51 per cent. subsidiaries. Turnover will be the turnover or revenue shown on the face of the accounts. Companies incorporated outside the UK as well as branches of non-UK companies are not within the new provisions. Also, the provisions are confined to companies and do not include limited liability partnerships.

HMRC guidance

HMRC guidance, although fairly vague in many respects, is useful in terms of setting out the sorts of things which would not constitute a failure to take reasonable steps to establish and maintain appropriate tax accounting arrangements.

The starting point is that the SAO will need to be someone who actually has the information and authority to fulfil their responsibilities. They must therefore be able to take the reasonable steps required to ensure that appropriate tax accounting arrangements are established and maintained and indeed to monitor those arrangements and identify any shortcomings which need to be remedied.

Tax accounting arrangements

As defined these are arrangements that enable taxes and duties to be calculated accurately. HMRC regards tax accounting arrangements as the "framework of responsibilities, policies, appropriate people and procedures in place for managing tax compliance risk". Clearly, companies in any event need to be aware of the liabilities and duties that are imposed on them by the taxing statutes and without that knowledge it is impossible to implement systems for managing tax compliance. HMRC acknowledges that there are different ways of achieving appropriate tax accounting arrangements. Ultimately, the arrangements should be such that they are sufficient to ensure that tax ought to be capable of being calculated in an accurate manner and tax risks identified and dealt with appropriately. HMRC suggests the following broad elements might be present:

• A process for gathering and recording information in a systematic way.
• Understanding the key tax compliance risks. This is clearly important because an understanding of the level of risk in different areas informs the way in which those risks are managed. For example, high volume, low value matters would be dealt with differently to high value matters involving questions of judgement.
• HMRC also suggests that there might be mechanisms for communicating roles and responsibilities.
• Monitoring activities to ensure that controls are operating effectively, the level of monitoring varying according to the level of risk present.
• In relation to tax-sensitive decisions, companies need to ensure that those making the decisions base them on a reasonable interpretation of accurate information and full knowledge of tax law and having taken appropriate advice. Having "full knowledge of tax law" is in itself rather an onerous requirement but nonetheless a company ought to be able to demonstrate that its arrangements are appropriate by having people with the right levels of competency and experience in complex and high value matters and taking appropriate advice where necessary from professional advisers.

The fact that HMRC takes a different view of a matter should not give rise to a breach. The new rules are about systems and compliance rather than producing computations which agree with HMRC's view of the law. Hence where companies' decisions are based on a sound analysis of the facts and circumstances by appropriately qualified personnel, or appropriate advisers, HMRC accepts that tax accounting arrangements are not inappropriate simply because HMRC takes a different view of the law.

Where significant judgement calls fail to be made, such as for example whether large expenditure items are income or capital, it will be necessary to show that somebody of the relevant experience or competency has made the decision or appropriate professional advice has been taken.

Reasonable steps

Essentially, "reasonable steps" would be putting in place the sort of systems discussed above. However, HMRC makes the point that what is appropriate can vary from company to company. For example, a company with personnel of very long service and experience may be in a different position to a company with new staff and different controls may be required. Presumably if the SAO reasonably considers that the new personnel have appropriate levels of experience based on previous employment that ought to be sufficient.

What is appropriate and reasonable will depend on the taxes concerned and the situations. With high volume taxes such as VAT, systems may be more important with appropriate checks to ensure that they are operating correctly. With single big ticket issues of judgement, it will be the experience of the personnel dealing with the matter which is most important. HMRC states the policy is to focus on significant risk.

HMRC suggests reasonable steps could include:

• processes to periodically check and test, as appropriate, system controls, process flows, transactions etc;
• policies and processes to ensure the retention and maintenance of required records (in whatever form);
• ensuring staff are appropriately trained and qualified and have the knowledge and experience required to undertake their functions;
• ensuring that the introduction of new systems and process or changes to them are supported by appropriate planning, risk assessment, implementation and evaluation activities; and
• processes to ensure compliance with all relevant legal requirements.

Outsourcing

Where functions are outsourced, reasonable steps are likely to include an assessment of the third party's competence to perform the activity rather than a detailed checking of work done. This is similar to internal delegation of responsibility to a tax director.

Change of SAO

Where the SAO changes in a period, HMRC would not expect the new SAO to check a predecessor's work where the tax accounting arrangements appear to be in order. Any errors which subsequently emerge and which could not have been known by the new SAO will not mean a careless or deliberately inaccurate certificate has been provided.

Mergers and acquisitions

Following a merger or acquisition an SAO would generally be expected to take reasonable steps to identify any shortcomings in the acquired entity and to have a plan to rectify them. A Type B certificate would need to highlight what those shortcomings were. HMRC accepts that it may take some time for any changes necessary to bring arrangements up to the required level to be made and that will be taken into account in determining what reasonable steps are. HMRC would not generally expect all opening balances and standing data to be fully verified above and beyond what would already be undertaken in the context of sensible commercial due diligence. A common-sense risk-based approach would be more appropriate.

Errors

HMRC states that an error will not automatically lead to the presumption that the accounting arrangements are inappropriate. In view of the level of errors that HMRC itself makes, this is at least one small acknowledgement of reality. In particular, it does not want "customers" to be inhibited from disclosing errors.

Private equity companies

The management companies of private equity groups will not be responsible for the tax accounting arrangements of any target company or group. Target groups which are "large" will need their own SAO.

Administration or insolvency

In this case there may be no person who has overall responsibility for a company's financial accounting arrangements as an administrator or insolvency practitioner may not fulfil this role. In this case, if there is no other person with such responsibility, there will be no SAO and the guidance confirms that the legislation will not apply.

SAO has ultimate responsibility

In the end, the SAO has ultimate responsibility. While tasks may be delegated, the SAO's job will be to ensure that the persons to whom they delegate are competent, and have the proper experience having regard to the level of complexity of the matters that they are dealing with. The SAO should also put in place appropriate monitoring to ensure that procedures are properly maintained and that there is a process for correcting any failure in procedures.

HMRC guidance as to what reasonable steps are in particular circumstances would suggest that where there are high volume, low value transactions such as in relation to standard or zero rated VAT supplies or deductibility of business travel expenses, it may be reasonable for staff – with appropriate training – to make their own claims or determine whether sales are standard or zero rated. HMRC accepts that there will almost inevitably be individual errors. However, provided the appropriate systems are in place, staff have the right degree of training and there was appropriate monitoring such that sample checks were made and an irregular pattern of transactions would be picked up, any human errors would not suggest that tax arrangements were not appropriate. A failure to make appropriate checks may, however, suggest arrangements were not appropriate.

Companies affected by these provisions will need to give early attention to the current systems they have in place including the controls and monitoring procedures and how they identify tax risk and allocate appropriate resource to it.