HMRC loses first senior accounting officer appeal

HMRC has lost the first appeal to be heard at tribunal in relation to the senior accounting officer (SAO) regime, with the First Tier Tribunal (FTT) cancelling two penalties against a finance director on the basis that he had taken reasonable steps to ensure the company established and maintained appropriate tax accounting arrangements, as required

The case concerned Kreeson Thathiah, who was the finance director of the Lenlyn group of companies, a privately owned group which included International Currency Exchange (ICE). The group’s activities included the provision of currency exchange and other financial services. [Kreeson Thathiah and the Commissioners for Her Majesty’s Revenue and Customs, [2017] UKFTT 0601, TC06043].

ICE was the representative member of a VAT group which included a number of other Lenlyn group companies. The group was partly exempt for VAT purposes and operated a partial exemption special method (PESM) for determining recoverable input tax.

Thathiah was the appointed SAO and provided certification to HMRC that a number of group companies, including ICE, had appropriate tax accounting arrangements in place for the financial years ended 28 February 2011, 29 February 2012 and 28 February 2013.

Thathiah left the company in 2014, and following his departure KPMG as the group’s tax advisors made an error correction notification on behalf of ICE, relating to around £1.36m of errors the firm considered had been made in ICE’s VAT returns between March 2010 and January 2014.

HMRC subsequently levied two £5,000 penalties on Thathiah in respect of two of the periods for which he had given SAO certificates, which he appealed.

At the FTT, HMRC argued that Thathiah had breached the main duty of a SAO by failing to conduct, or have in place any system of, selective or ‘thematic’ testing or sampling of figures in the ICE VAT returns or of individual transactions to ensure that the figures in the returns were correct, and that he instead relied excessively on variation testing, i.e. simply comparing figures with those in previous returns.

In particular, there were regular, consistent and systematic misattributions of input tax and errors in accounting for the reverse charge, and HMRC said that this was because by not undertaking any selective testing, consistent errors will not be picked up and can become embedded.

The tribunal judge said much of HMRC’s approach, both before and at the hearing, focused on whether the appellant had a reasonable excuse. However, the key question was in fact whether Thathiah took ‘reasonable steps’ to ensure that ICE established and maintained appropriate tax accounting arrangements, and in particular whether he took reasonable steps to monitor those arrangements and identify any respects in which they were not appropriate.

According to the judge, ‘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.’

The judge said the evidence showed Thathiah had made a number of improvements in processes and controls during his time at the group, which included bringing in more staff with specialist training, greater automation in an effort to reduce errors, expanding  the tax risk register and introducing a comprehensive tax policy document.

The judge said: ‘The overall impression is one of gradual improvement, against a background of limited resources and repeated requests by the appellant for additional resource.’

Selective testing

The FTT also challenged HMRC’s assertion that failure to undertaken selective testing meant Thathiah was not taking reasonable step to ensure the certification process was watertight.

The judge said: ‘The absence of selective testing can certainly lead to errors becoming embedded, and so in principle such testing must be desirable. But the question here is whether selective testing was a reasonable step in the particular circumstances of this case. Taking all the evidence into account I am not satisfied that HMRC have established a breach of the main duty in failing to ensure selective testing.’

As the FTT then ruled that HMRC had not established Thathiah had breached the rules regarding his role as SAO, the penalties were cancelled.

Heather Self, a tax expert at law firm Pinsent Masons, said: ‘The decision is a reminder that HMRC is taking an increasingly tough line on imposing personal penalties on SAOs.

‘In this case the penalties seemed to have been almost automatically imposed, without much consideration of the circumstances and without applying the proper tests.’

HMRC criticised

The FTT was also critical of several aspects of HMRC’s handling of the case. These included failing to give Thathiah any information about the nature of the errors identified by KPMG until late in the appeal stage; failure to take account of the fact he was unrepresented and had no support from his former employer; and failing to draw a distinction between what could be expected of 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.

In addition, the FTT reiterated that HMRC had been wrong to focus to a significant extent on the question of reasonable excuse rather than ‘reasonable steps’, saying that this led to an assumption that a lack of resources was not relevant. However, the FTT said the SAO was entitled to argue he had tried, and failed, to obtain access to additional resources to address the relevant shortcoming.

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.’

Kreeson Thathiah and the Commissioners for Her Majesty’s Revenue and Customs, [2017] UKFTT 0601, TC06043 is here.

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