An FD’s guide to avoid SAO fines

The number of finance directors receiving fines from HMRC for breaching tax transparency rules has hit an all-time high.

The sharp rise in penalties comes as the government has begun to focus on the Senior Accounting Officer regime, introduced in 2009, as it cracks down on non-compliance.

With record levels of punishments meted out over the last year, and the potential for that number to rise again next year, we investigate the SAO regime and advise on how to remain on the right side of the law.

Why has there been a record level of fines?

The SAO enforcement regime was introduced in 2009. However, there was something of a grace period for three years where no fines were handed out. HMRC began levying fines in the 2012-2013 financial year, when 46 SAOs were hit.

This number has risen steadily year-on-year, with 181 SAOs receiving fines in the last financial year.

It’s a clear signal that HMRC’s ‘soft touch’ period is over, and that finance professionals are now expected to comply or face the consequences.

Who is affected by the regime?

The regime covers the designated senior accounting officer of large businesses, giving them responsibility for tax accounting arrangements.

Large businesses for this purpose are defined as those with a turnover of more than £200m, or a balance sheet of more than £2bn. Where a group of companies meets these thresholds, each company within is expected to comply.

The SAO is a designated individual director or officer, commonly the finance director or chief financial officer.

What makes the SAO regime stand out is that it’s the first time HMRC has explicitly mixed tax compliance with individual personal liability.

What is the SAO regime?

HMRC explains the SAO as “a measure aimed at reducing the tax gap through improvements in businesses’ tax governance and systems”.

That means that the government wants to ensure big businesses are paying their share of tax. In the last year, HMRC secured an additional £450m in corporation tax from small business investigations, and this is its answer to larger businesses.

Specifically, large businesses must appoint an SAO, who must then ”take reasonable steps to ensure that the company has appropriate tax accounting arrangements in place” and to ensure that these processes are carried out appropriately.

The SAO must also work to prevent tax evasion, including fraud which could carried out by members of staff or by associated persons.

The fine for non-compliance is £5,000 for the appointed SAO. While this won’t break the bank, it’s hoped the reputational damage will be enough of a deterrent.

How can an SAO avoid a fine?

Fortunately for FDs and CFOs, HMRC recognises that large businesses are so complex that it would be nearly impossible to fully comply in every area with no hiccups. Instead, the aim is to be able to show that all the correct processes and failsafes are in place and utilised.

Accounting arrangements will be judged on whether all relevant tax liabilities can be calculated accurately. Businesses will also need to prove that they have taken appropriate responsibility to ensure that they aren’t enabling staff and the wider supply chain to engage in tax evasion.

To avoid falling foul of the law, ensure your business has robust processes in place for handling finances and taxes. This includes appropriate planning, risk assessment and training – anything which can be shown to reduce the opportunity for mistakes. Follow this with strict sign-off procedures.

Make use of technology to handle finances and tax issues, especially where the technology has specialist compliance applications. This will tighten up data collection, tax calculation and make processes more accurate and efficient.

Ensure your audit trails are rigorous and fully documented, again with strict sign-offs along the way.

By ensuring that your processes are thorough, that appropriate staff are fully informed of their duties, and that procedures are followed, not only do you reduce the chance of accounting mistakes, but you’ll also stay on the right side of regulation.

For more detailed information, HMRC has produced an in-depth guide available here.