Schedule 46 of the Finance Act 2009 introduces a new responsibility for the Senior Accounting Officer (SAO) of large companies (this role is most likely to be undertaken by the company's Finance Director) to make sure the company gets its tax figures right. Non-compliance can lead to a personal fine on the SAO concerned. This is part of a package of measures, from an increasingly aggressive HMRC, which have increased the tax compliance burden on companies.

Why is this important?

The SAO can be personally fined and it is unlikely that these fines can be covered by the company or by the company's D&O insurance policy. At the moment the fine is limited to £5k per offence but this is likely to be increased in the future.

Key points

  • The SAO must take reasonable steps to ensure that his or her company establishes and maintains appropriate tax accounting arrangements. The SAO will usually be the Finance Director or other senior director who has overall responsibility for the company's financial accounting arrangements.
  • Where a company is a member of a group, the SAO may fulfil that role for some or all of the UK companies.
  • A large company is defined as one with a turnover of £200m or more or its gross assets exceed £2bn.
  • The obligations imposed by the legislation apply in relation to financial years beginning on or after 21 July 2009. So, for example, a company that makes its accounts up to 31 December will be first affected for the year ending 31 December 2010.
  • The SAO has to put in place systems to establish, maintain and monitor appropriate tax accounting arrangements for each financial year after commencement of the legislation and provide HMRC with a certificate to that effect.
  • 'Appropriate' tax accounting arrangements are very broadly described and cover the entire end to end financial process from initial data input into accounting systems to the final point of arriving at the figures which form the basis for completion of a company's tax returns.
  • Failure to put in place such systems could lead to a personal penalty on a SAO of £5k and a further penalty of £5k if the SAO fails to provide a correct certificate that such systems have been put in place. HMRC has broadly six years within which to issue a penalty.

RPC's corporate team is currently assisting a number of clients in reviewing articles of association to ensure the incorporation of appropriate indemnification provisions in relation to this issue. We also have a market leading D&O insurance team.

Our dedicated specialist tax risk and dispute resolution team is currently advising a number of clients on tax risk issues, including this one.

RPC comments

In relation to whether the SAO can be covered by the company for these fines, whilst the legal position is not completely clear, RPC's view is that (assuming the SAO is a director):  

  1. the company will not be able to indemnify the SAO in respect of any fine imposed by HMRC and would only be able to indemnify the SAO in respect of defence costs relating to that fine; and  
  2. a typical D&O insurance policy is likely to exclude cover in respect of the fine but will cover defence costs in proceedings relating to that fine.

(The position might be different in the unlikely event of the SAO not being a director (or shadow director) – in which case it is more arguable that the company could indemnify the SAO in respect of the fine (as well as defence costs)).