The First-tier tribunal cancelled two penalties imposed personally on the individual, in the first tribunal decision concerning SAO penalties.
"The decision is a reminder that HMRC is taking an increasingly tough line on imposing personal penalties on SAOs," said Heather Self, a tax expert at Pinsent Masons, the law firm behind Out-Law.com. "In this case the penalties seemed to have been almost automatically imposed, without much consideration of the circumstances and without applying the proper tests."
Figures obtained by Pinsent Masons showed a 17% increase in penalties issued under the SAO regime in 2015/16, up to 181 fines from 151 the year before.
Large companies must appoint an individual to be their SAO. The main duty of the SAO is to ensure the company establishes and maintains appropriate tax accounting arrangements to allow tax liabilities to be calculated accurately in all material respects. The SAO must also give HMRC a certificate each financial year stating whether the company had appropriate tax accounting arrangements. A fixed £5,000 penalty can be chargeable on an SAO personally if they fail in their duties. There is a defence to the imposition of penalties if the SAO can show that there is a reasonable excuse for the failure.
The individual concerned in this case was the finance director of a privately owned group of companies and gave SAO certificates for several years. After he ceased to be employed by the group, KPMG, the group's tax advisers, notified HMRC of errors they thought had been made in the VAT returns of one of the group companies for several years, representing under payments of VAT of around £1.36 million. HMRC levied two £5000 SAO penalties on the individual in respect of two of the periods for which he had given SAO certificates.
HMRC argued that the individual breached the main SAO duty because he had no system in place for selective testing or sampling of figures in the VAT returns or of individual transactions to ensure that the figures in the returns were correct, and that he relied excessively on comparing figures with those in previous returns. The individual said that he had done what he could with the resources available to him.
Judge Sarah Falk said that HMRC had incorrectly focused on whether the SAO had a reasonable excuse for the failure, rather than whether he had breached the main duty by failing to take reasonable steps to ensure that the company establishes and maintains appropriate tax arrangements. She said that the test of whether there has 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," Judge Falk said.
"The matters to take into account will include the size, complexity and nature of the business, but in my view 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," she said.
The judge said relying on detailed work undertaken by KPMG several years before the years in question to agree a new partial exemption method and checks carried out as part of their audit work as well as the involvement of an HMRC VAT specialist in reviewing information after the partial exemption method was agreed, did not amount to a failure to take reasonable steps, taking into account the small scale of the business and the limited resources available.
"Iin my view there is a significant distinction between a company with a small finance team that is just over the qualifying company threshold and (say) a major financial institution with a large tax department, where the SAO may well have a more significant degree of control over resources, and systems and controls can be expected to be sophisticated," she said.
"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," Judge Falk said.
The legislation provides that an insufficiency of funds is not a reasonable excuse for an SAO failure, unless attributable to events outside the person’s control. The judge said it was "not at all clear to me that an SAO would necessarily be prevented from rely[ing] on paragraph 8 [the reasonable excuse defence] where it can be established that he or she has tried, and failed, to obtain access to additional resources to address the relevant shortcoming".
Because of concerns about taxpayer confidentiality, HMRC did not provide the individual 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.
The judge expressed concerns about HMRC's handling of the case. She said that HMRC's refusal to give the individual any real understanding or knowledge about the errors identified by KPMG until a late stage in the appeal "appear[ed] unfair" to him.
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.
The judge also expressed concerns that HMRC had failed to make sufficient allowance for the fact that the individual was unrepresented and had no access to support or information from his previous employer.
"HMRC need to sharpen up their case handling – there have been a number of recent cases where they have been criticised," Heather Self said.
The Supreme Court has recently upheld a decision to debar HMRC from participating in further action in a VAT case involving BPP, the professional training provider, because HMRC had failed to comply with directions issued by a tribunal judge.