UK: Personal Liability For Senior Accounting Officers Over Tax Accounting Arrangements— First Court Decision Provides A Cautionary Tale

The UK Senior Accounting Officer (SAO) regime was brought in by the Finance Act 2009 and requires large companies and groups to identify the individual who is responsible for certifying to the UK tax authority (HMRC) each year that "appropriate tax accounting arrangements" are in place. The SAO has personal liability to take reasonable steps to ensure that this is the case, with a breach of the rules resulting in a flat-rate personal penalty of £5,000. In Kreeson Thathiah v. HMRC, the SAO regime was tested in the courts for the first time and the judgment provides useful practice points as to what "appropriate tax accounting arrangements" might look like in practice. The judge cancelled the penalties HMRC sought to impose on Mr. Thathiah. SAOs should take some comfort in the common sense, pragmatic approach the judge took. What constitutes "reasonable steps" for an SAO to comply with the regime will depend on the size of the business and the resources available. While ultimately a victory for the SAO, the way that HMRC approached this case provides a cautionary tale for all SAOs.

The SAO Regime

The SAO regime aims to protect the tax yield by identifying a clear point of responsibility for tax accounting within large companies and groups, in the hope that the prospect of personal liability means that an SAO will adopt rigorous tax accounting policies and procedures resulting in fewer errors in tax returns.

The SAO regime applies in relation to each "qualifying company," being a UK incorporated company which itself has, or which is a member of a group in which the UK incorporated companies have on an aggregate basis, a turnover of over £200 million or balance sheet assets of over £2 billion. A qualifying company must identify the director or officer who has overall responsibility for the company's financial accounting arrangements (the SAO), and notify HMRC of his or her identity (failure to do so carries a penalty). Under paragraph 1 of Schedule 46 to the Finance Act 2009, the "main duty" of the SAO is to take reasonable steps to ensure that the company establishes and maintains appropriate tax accounting arrangements, to take reasonable steps to monitor those arrangements, and to improve them if appropriate. "Appropriate tax accounting arrangements" means accounting arrangements that enable the company's UK tax liabilities to be calculated accurately in all material respects. The SAO must certify to HMRC each financial year that the relevant company had such arrangements throughout the financial year and, if not, give an explanation of the deficiencies. Failure to comply with the main duty at any time in a financial year results in a personal flat-rate penalty for the SAO of £5,000, unless the SAO can establish that there was a reasonable excuse.

The Case

Background

Kreeson Thathiah v. HMRC1, heard before the First-Tier Tribunal Tax Chamber (the Tribunal), was an appeal by Mr. Thathiah (the appellant), the former finance director of the Lenlyn group of companies. Lenlyn is a family controlled, unlisted group, including a UK incorporated company which was the VAT representative member for a currency exchange and other cash handling businesses. As with many financial services businesses, the VAT recovery position of the group was somewhat complex and would have been an obvious issue requiring careful attention from both the taxpayer company and HMRC. During his time with the group, the appellant provided unqualified certifications to HMRC as the SAO of a number of group companies for the financial years ending 2011 through 2013.

It was only following the appellant's departure from the group (for unrelated reasons) that historic errors in the VAT returns of one of the group companies were uncovered by KPMG, the quantum of the errors being estimated at around £1.36 million. As is often the case, the errors came to light in the course of a vendor due diligence exercise for a potential sale to a third party. The errors themselves were various and related to VAT erroneously recovered on exempt supplies, VAT recovered twice on the same property, costs incorrectly allocated under the partial exemption special method and the incorrect application of the reverse charge mechanism. KPMG issued an error correction notice detailing the errors to HMRC. The appellant's subsequent evidence was that he would have challenged at least some of the conclusions reached in the error correction notice if he had been given the chance. The appellant's successor as SAO qualified the SAO certificate for the year Mr. Thathiah had left by reference to "one failing in internal control functions relating to the reporting and recoverability of VAT in respect of specific areas."

At the request of HMRC, the appellant subsequently met with HMRC. As the appellant had left the group by this stage, he had not seen the written error correction notice provided by KPMG (and HMRC asserted that taxpayer confidentiality prevented them from showing it to him at this stage). The Tribunal did not consider that he was in a position to address the issues properly at the meeting. Following the meeting, HMRC made penalty assessments against the appellant of £5,000 each in respect of the financial years ended in 2012 and 2013. The appellant appealed the penalty assessments, ultimately to the Tribunal.

Reasonable Steps

Much of HMRC's approach to the case was on the footing that there had plainly been a breach of the main duty, and focused on whether the appellant could show a reasonable excuse for his breach. However, the Tribunal noted that the existence of material or repeated errors does not necessarily signal that the main duty has been breached. For a breach to be established, it must be shown that there has been a failure by the SAO to take "reasonable steps" to ensure that the company establishes and maintains appropriate tax arrangements. This is not an absolute duty to ensure that the arrangements exist. Whether reasonable steps have been taken is not a "one size fits all" question. It will include consideration not only of the size and complexity of the business, but also of the resources available to the individual in question and his or her authority to bring about change.

In this instance, one might think that Mr. Thathiah had taken a good deal of trouble with his duties in mind. All the more so as the finance team was described by KPMG as "a relatively small one" and by the appellant as being "run on a shoestring"—he had on numerous occasions requested additional resources for the tax function (although these requests were not always granted).

In particular, the appellant had: (1) established an internal tax team of two people with whom he met frequently (an experienced accountant as financial controller, and a tax manager with a payroll tax background who received VAT training and on-going support from KPMG); (2) increased automation in an effort to reduce errors; (3) expanded the tax risk register; and (4) introduced a comprehensive group tax policy document. In addition, KPMG was engaged to conduct a yearly audit, which involved a substantive review of the VAT calculations and checking sample invoices against the returns. The appellant relied to a large extent on the work performed by his staff and KPMG although he retained the ultimate authorisation powers and conducted sense checks, which were essentially variance checks comparing VAT figures included in one return to equivalents in earlier returns to look for anomalies.

A difficulty for Mr. Thathiah, quite apart from errors having come to light after he had left the business, was that HMRC's internal manual on the SAO regime included a specific reference to sampling. That is, it gave an example of a business in a complex VAT recovery position which conducted quarterly sampling of invoices, as a means of double checking whether services were appropriately classified for VAT purposes. The manual stated that this meant there were appropriate checks and controls, so that miscoding a small number of invoices through human error would not be regarded as a shortcoming in the tax accounting arrangements. HMRC's case was essentially that Mr. Thathiah only performed variance tests against earlier periods, rather than sampling (he relied on KPMG's annual audit for this), meaning that consistent errors would not be detected and would become embedded, and that for a business with complex VAT affairs this prima facie amounted to a breach of the paragraph 1 main duty.

Whilst the Tribunal agreed with HMRC that the company's arrangements were not, in fact, "appropriate tax accounting arrangements," the Tribunal concluded that the appellant had taken reasonable steps to establish and maintain appropriate tax accounting arrangements. Essentially, it agreed with his case that he had done what he could with the resources available. The team and company size were relevant considerations as to what amounted to "reasonable steps" in context, and the Tribunal considered that it had not been inappropriate for the appellant to rely on KPMG and his staff—one of whom had received full training and had access to ongoing support from KPMG, and the other, though not a tax specialist, was an experienced accountant. The Tribunal found that the appellant had put procedures in place, and that, whilst largely undocumented, in the context of a small team this was not necessarily problematic, so long as the procedures were well understood by those involved. While sampling would be desirable in principle, the Tribunal was not satisfied that HMRC had established a breach of the main duty due to its absence.

Discussion and Practical Points

Mr. Thathiah was in a rather invidious position—it seems to have been taken as read that there had been failures in internal control functions before he was even made aware that issues had been raised. Certainly "fairness" factors played a role in the judgment. The Tribunal noted the appellant was unrepresented and that he had no access to support or information from his former employer, and that the penalties could have a large impact on the appellant's reputation and, potentially, future employment prospects, over and above the financial impact of the fine. Whilst the Tribunal noted there was no evidence that the appellant was "singled out" in this case, it stressed the importance of HMRC's approach to such cases not only being fair, but also being seen to be fair. The Tribunal also observed that HMRC's approach to the case had effectively been to assume that any qualifying company should be held to the same standard (seemingly, a standard set by HMRC's internal guidance rather than statute) regardless of size or resource. The Tribunal disagreed with this approach, and considered that what constitutes "reasonable steps" will be dependent on the size of the business and available resources and other contextual factors. A major financial institution with a more sophisticated tax function will likely find its SAO held to a higher standard than that of the appellant in this case (on the basis that in such a scenario the SAO "may well have a more significant degree of control over resources").

It is to be hoped that HMRC takes these points on board and applies the regime in a measured way going forward. The purpose of the SAO regime is to promote transparency by providing a clear point of responsibility for internal accounting systems—systems which, as the Explanatory Notes to the legislation rightly state, large companies should have in place in any event. It would be most unfortunate if the SAO regime itself becomes a disincentive to dealing openly with errors that inevitably arise in any business for fear of personal liability.

Nevertheless, the case underlines that SAOs need to bear in mind the requirements of the regime and that—based on the Tribunal's judgment—its requirements will be more stringent for more sophisticated groups with access to greater resources. Particular difficulties can arise in relation to problems that come to light for prior years where the SAO has left the business. Certain key practice points emerge from the case:

  • The group's internal tax policy should be written and robust, and internal tax accounting procedures and compliance measures should be clearly documented;
  • SAOs should periodically assess the suitability and efficiency of monitoring processes, and this assessment should also be clearly documented;
  • Additional tax resources (external advice, staff, training) should be requested in writing if needed;
  • SAOs should be alive to HMRC's views in its SAO manual and elsewhere on procedures that should be adopted by particular types of businesses (for instance, sampling of invoices in relation to partially VAT-exempt businesses such as those in the financial services industry). Where these are relevant to the qualifying company, the SAO should ensure that these in particular are covered in written tax accounting policies and appropriately monitored; and
  • A departing SAO may find it prudent to take advice to protect his or her position should an issue emerge in future.

Footnotes

1 [2017] UKFTT 601 (TC).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.