HM Revenue & Customs (HMRC) has issued fines for 115 senior finance directors in the last year, a 150%rise from five years ago. It’s a sign that HMRC is standing its ground in efforts to hold executives personally responsible for corporate failings.
The Senior Finance Officer (SFO) regime was introduced in 2009, with the aim of increasing the focus on tax in company boardrooms and ensuring businesses have robust tax accounting and governance systems in place. Large UK companies must identify who their SFO is and notify HMRC accordingly each financial year. A company is considered large if (along with other UK group companies) it meets one or both of the following size limits:
- Annual turnover is more than £200 million.
- Gross balance sheet assets are in excess of £2 billion.
The SFO must take steps to ensure that their company establishes and maintains appropriate tax accounting arrangements. After the end of each financial year, the SFO must provide a certificate to HMRC stating that:
- The company had appropriate tax accounting arrangements throughout the year, or
- The company did not have appropriate arrangements, giving details about the areas in which the arrangements were not appropriate.
HMRC initially adopted a light-touch approach. However, there has been a marked increase in the number of penalties issued over the last three years. There are three different fixed penalties of £5,000.
However, HMRC’s more aggressive tactics came in for criticism when the first legal challenge against the imposition of SFO penalties was heard in August. Although the First Tier Tribunal determined that the company’s accounting arrangements were not appropriate, they overturned the two £5,000 penalties imposed by HMRC on the basis that the SFO had taken reasonable steps. In reaching this decision, the Tribunal took into account the limited resources available to the SFO, with a distinction being drawn between a company with a small finance team that is just over the qualifying company threshold and a major financial institution with a large tax department.
