Update on personal liability

The senior accounting officer (SAO) rules were introduced in 2009 - and the first-tier tribunal has recently released the first ever decision on them. Failure to comply with the rules can lead to personal financial and reputational liability for a group’s appointed SAO (usually the CFO or equivalent), so the tribunal’s generally sympathetic approach to the rules is good news. That said, there are some things for SAOs to think about.

Background - the SAO regime

The SAO regime applies to companies or groups with at least either £2bn of balance sheet assets or £200m annual revenues. Where it applies it requires an individual to be appointed as the SAO for the group/company, and that this individual takes on personal responsibility for two things. First, the SAO has to take reasonable steps to ensure that the group establishes and maintains (essentially) robust internal tax accounting and control procedures. Second, the SAO has to certify to HMRC annually whether those procedures are in place.

The SAO is personally liable for a fine if he or she fails to comply with the first duty, or if there is a careless or deliberate inaccuracy in a certificate provided under the second duty. In either case the SAO can raise a defence of there being a reasonable excuse for the failure/inaccuracy.

The tribunal case: Thathiah v HMRC

Mr Thathiah was the finance director of Lenlyn, a privately owned group that carried on a financial services business - and in particular a currency conversion business.

At the relevant time, he was also the SAO of the group. He left Lenlyn in mid-2014. Later that year KPMG notified HMRC of various VAT errors relating to the currency business that had occurred while Mr Thathiah was the SAO - the total amount of tax underpaid was c. £1.4m, and HMRC accepted both the notifications and amounts without further investigation.

However, HMRC then approached and interviewed Mr Thathiah and subsequently fined him on the basis he had breached his duties under the SAO regime for two of the relevant years. Mr Thathiah has now successfully appealed these fines in front of the tribunal.

The tribunal's decision has considerable discussion of the VAT control systems in place for the currency business, the roles performed by different individuals, advice taken from external advisers, and HMRC involvement. The main points were:

  • the individual in Mr Thathiah's team who was directly responsible for VAT had no prior technical VAT background, but had been sent on a full KPMG training course and had a budget for raising ad hoc queries with KPMG; his supervisor also had no VAT background but was a qualified accountant
  • checking of draft VAT returns by Mr Thathiah was mostly “variance” checking - i.e. comparing the draft return against previous returns to look for inconsistencies, though there was some detailed checking of specific items
  • Mr Thathiah described the group as being “run on a shoestring” - more could have been done with more resources (which he had asked for) but these had not been made available
  • the group relied on KPMG’s annual audit of the group to identify problems. KPMG had also negotiated a new VAT partial exemption method with HMRC (it was the practical implementation of this that had given rise to a number of the errors) and carried out a detailed VAT review of the group. HMRC had subsequently requested and received detailed information on the operation of this process, on more than one occasion.

It was also relevant to the tribunal that Mr Thathiah had no or little information from either Lenlyn or HMRC about the detail of what had actually gone wrong until he appealed his fines to the tribunal. The tribunal accepted that when the issues were put to him he knew about the technical background, and in fact disagreed with some of the conclusions that had been reached - he had not simply been ignorant of the points.

The decision and what it means in practice

In quashing the fines, the tribunal clearly had sympathy for Mr Thathiah, in particular because of the lack of hard information he had access to about the basis on which HMRC had tried to fine him. As a result, this is to some extent a fact-specific decision.

However, the tribunal also disagreed with the general approach of HMRC to the SAO rules. HMRC had assumed that there was a prima facie breach of the duties, and that Mr Thathiah had to show there was a reasonable excuse - in fact, the tribunal concluded that there was no breach, because Mr Thathiah had taken reasonable steps to put in place the right procedures. The fact that mistakes had nevertheless occurred did not mean there was necessarily a breach to be excused – the tribunal was (helpfully) very clear that the SAO regime does not impose an absolute duty to prevent errors.

In particular, the tribunal made it clear that HMRC has to take into account not only the size and complexity of the group and its business, but also the role of the individual SAO and what in practice he or she has done in relation to tax controls and procedures. In this case, Mr Thathiah had clearly made some improvements to the VAT compliance position of the group, against a background of limited resources and attempts to improve these. Although the group was large enough to be within the SAO regime, it was in a very different position to (say) an international bank, and that had to be considered - the regime is not “one size fits all”. As a result, the requirements of the SAO rules had to be applied in that context, taking into account occurring other things like practical availability of resources.

In addition, the fact that checking of returns was mostly variance checking didn’t in itself amount to a breach of the SAO duties in this context. The work that KPMG had done set a “baseline” for VAT compliance, and variance checking against that baseline was reasonable in this context.

All of this is clearly helpful, in that it indicates the tribunal is not taking a hardline approach to the SAO rules. It does, though, show that HMRC is prepared to impose fines under this regime even where relatively small amounts of tax are at stake. Individuals who are, or are asked to be, the SAO for their group should consider this responsibility even more carefully. What this case also demonstrates is that the fact an SAO has left employment with a group will not in principle prevent HMRC from taking action against him or her for things done/not done on his or her watch as SAO. As a result, SAOs who do move on to a new employer should be considering trying to retain access to information/records needed to defend an SAO fine imposed by HMRC.

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Paul Concannon

Paul Concannon

Partner, Head of Tax & Restructuring
United Kingdom

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