FTT upholds SAO penalties for technical failure because it lacks judicial review jurisdiction
Our pick of this week's cases
In Castlelaw (No. 628) Ltd and Douglas v HMRC [2020] UKFTT 34 (TC) (17 January 2020), the First-tier Tribunal (FTT) dismissed the taxpayers' appeal and upheld the penalty against Castlelaw (No. 628) Ltd, a dormant company, for failing to name its senior accounting officer (SAO), Mrs Douglas, for the relevant period and also upheld the penalty against Mrs Douglas, as the SAO of the dormant company, for failing to submit a certificate about the appropriateness of the company’s tax accounting arrangements for that period.
Despite Castlelaw being a dormant company that had no tax liabilities, it was a qualifying company, and therefore subject to the SAO regime, because it was a member of a larger group of companies.
Mrs Douglas was the SAO for 33 of the companies in the group (including Castlelaw) and also the SAO for the entire group.
Given the large and complex group structure, a group organisation chart formed the basis for the preparation of the notification and certificate documents for the group companies for the SAO regime. For the year in question, when changes were made to the group chart, Castlelaw and another dormant company were inadvertently removed from the chart, which resulted in the failure to notify and provide certificates for those companies for that particular year. Consequently, both companies and their SAOs were liable to a penalty. Because the SAO penalty rules only allow one of each type of SAO penalty for a group for any one year, HMRC assessed a £5,000 penalty on Castlelaw for failing to name its SAO and another £5,000 penalty on Mrs Douglas for failing to submit the SAO certificate for Castlelaw, but did not assess penalties in respect of the same failures relating to the other dormant company. The taxpayers appealed against the penalties on the grounds of reasonable excuse, arguing that there was a reasonable excuse for the failure because the company was dormant, the amount of the penalties were disproportionate and the mistake that caused the failure was innocent.
The FTT upheld the penalties because none of those grounds constituted a reasonable excuse. Dormant companies are not removed from the SAO regime. In accordance with case law, a failure caused by an innocent error does not constitute a reasonable excuse.
The amount of the penalties being disproportionate does not constitute a reasonable excuse, although the FTT suggested it could form the basis of a judicial review claim against HMRC’s decision to assess the penalties in the first place. When an SAO or a company is liable to an SAO penalty, HMRC has a discretion as to whether or not to assess such a penalty. It is at that stage that the FTT would have expected HMRC to have given consideration to Castlelaw’s dormancy, the fact that it had no tax liabilities and that for SAO purposes no tax accounting arrangements were required for it other than to check that it remained dormant throughout the period, the exemplary compliance record of the company, its SAO and the group for all previous years, as well as the fact that the same £5,000 penalty that was applied in this case for a mere technical breach would also be assessed in respect of more serious breaches of the SAO rules.
The FTT dismissed the taxpayers' appeal and upheld the penalties for failing to name the SAO of a dormant company and for failing to submit an SAO certificate in relation to the same dormant company.
Why it matters: This case is salutary reading for anybody who is an SAO or advises in this area.Although the circumstances did not amount to a defence of reasonable excuse (innocent mistake relating to a dormant company in respect of which no tax arrangements for SAO purposes were required other than checking that the company remained dormant throughout the period), those circumstances could be relevant to a claim for judicial review, but this was outside the jurisdiction of the FTT.
The purpose of the SAO rules is to encourage tax accounting compliance. However, in this case, HMRC’s assessment of the penalties (seemingly without exercising appropriate discretion) resulted in penalties being imposed in the case of a mere technical breach of the SAO rules, even though there was no tax at risk: an outcome that is not consistent with the purpose of the rules. For taxpayers that find themselves in a similar position, it may be worth making a prompt claim for judicial review, as well as appealing against the penalty.
FTT upholds SAO penalties for technical failure because it lacks judicial review jurisdiction
Our pick of this week's cases
In Castlelaw (No. 628) Ltd and Douglas v HMRC [2020] UKFTT 34 (TC) (17 January 2020), the First-tier Tribunal (FTT) dismissed the taxpayers' appeal and upheld the penalty against Castlelaw (No. 628) Ltd, a dormant company, for failing to name its senior accounting officer (SAO), Mrs Douglas, for the relevant period and also upheld the penalty against Mrs Douglas, as the SAO of the dormant company, for failing to submit a certificate about the appropriateness of the company’s tax accounting arrangements for that period.
Despite Castlelaw being a dormant company that had no tax liabilities, it was a qualifying company, and therefore subject to the SAO regime, because it was a member of a larger group of companies.
Mrs Douglas was the SAO for 33 of the companies in the group (including Castlelaw) and also the SAO for the entire group.
Given the large and complex group structure, a group organisation chart formed the basis for the preparation of the notification and certificate documents for the group companies for the SAO regime. For the year in question, when changes were made to the group chart, Castlelaw and another dormant company were inadvertently removed from the chart, which resulted in the failure to notify and provide certificates for those companies for that particular year. Consequently, both companies and their SAOs were liable to a penalty. Because the SAO penalty rules only allow one of each type of SAO penalty for a group for any one year, HMRC assessed a £5,000 penalty on Castlelaw for failing to name its SAO and another £5,000 penalty on Mrs Douglas for failing to submit the SAO certificate for Castlelaw, but did not assess penalties in respect of the same failures relating to the other dormant company. The taxpayers appealed against the penalties on the grounds of reasonable excuse, arguing that there was a reasonable excuse for the failure because the company was dormant, the amount of the penalties were disproportionate and the mistake that caused the failure was innocent.
The FTT upheld the penalties because none of those grounds constituted a reasonable excuse. Dormant companies are not removed from the SAO regime. In accordance with case law, a failure caused by an innocent error does not constitute a reasonable excuse.
The amount of the penalties being disproportionate does not constitute a reasonable excuse, although the FTT suggested it could form the basis of a judicial review claim against HMRC’s decision to assess the penalties in the first place. When an SAO or a company is liable to an SAO penalty, HMRC has a discretion as to whether or not to assess such a penalty. It is at that stage that the FTT would have expected HMRC to have given consideration to Castlelaw’s dormancy, the fact that it had no tax liabilities and that for SAO purposes no tax accounting arrangements were required for it other than to check that it remained dormant throughout the period, the exemplary compliance record of the company, its SAO and the group for all previous years, as well as the fact that the same £5,000 penalty that was applied in this case for a mere technical breach would also be assessed in respect of more serious breaches of the SAO rules.
The FTT dismissed the taxpayers' appeal and upheld the penalties for failing to name the SAO of a dormant company and for failing to submit an SAO certificate in relation to the same dormant company.
Why it matters: This case is salutary reading for anybody who is an SAO or advises in this area.Although the circumstances did not amount to a defence of reasonable excuse (innocent mistake relating to a dormant company in respect of which no tax arrangements for SAO purposes were required other than checking that the company remained dormant throughout the period), those circumstances could be relevant to a claim for judicial review, but this was outside the jurisdiction of the FTT.
The purpose of the SAO rules is to encourage tax accounting compliance. However, in this case, HMRC’s assessment of the penalties (seemingly without exercising appropriate discretion) resulted in penalties being imposed in the case of a mere technical breach of the SAO rules, even though there was no tax at risk: an outcome that is not consistent with the purpose of the rules. For taxpayers that find themselves in a similar position, it may be worth making a prompt claim for judicial review, as well as appealing against the penalty.
