SAOG18875 - In what circumstances is a penalty chargeable: exercising discretion whether to assess an SAO penalty – examples

Example 1 – dormant company in otherwise compliant group

Minicorp Ltd is a wholly-owned subsidiary of Megacorp Plc, a large industrial conglomerate. It is a qualifying company because it is a member of a qualifying group comprising other UK-incorporated subsidiaries, see SAOG11240.

A risk assessment of the Megacorp Plc group for the financial year (FY) ended 31 December 2018 found that, whilst the SAO certificate listed all other members of the group, Minicorp Ltd had been omitted. Further examination of Megacorp Plc’s SAO certificates for previous years found that Minicorp Ltd had never been included in SAO certificates or notifications filed by the group.

Consequently, Minicorp Ltd was strictly liable to a penalty for failing to notify the identity of its SAO, potentially going back 6 years, and the SAO was similarly liable to a penalty for omitting the company from the group’s SAO certificates going back 6 years.

However, Minicorp Ltd’s accounts for FY 31/12/19 showed that it did not trade, nor were there any accounting credits or debits in that period. The only entry in the balance sheet was the company’s called-up share capital. The company did not have any employees in that year.

Minicorp Ltd had minimal need for tax accounting arrangements and in its own right, represented a low compliance risk to any of the taxes included in the SAO regime (see SAOG10300). The Megacorp Plc group had a good compliance record in terms of making returns and paying tax.

In the case of Minicorp Ltd, HMRC should exercise its discretion not to assess failure penalties on the SAO or the company. Instead, the reasons for not assessing penalties should be explained to the SAO and the company, both of whom should also be advised of any steps they need to take to avoid similar failures in the future.

Example 2 – technical failure in company’s notification

Mr Schmidt was the Senior Accounting Officer of Bigcorp PLC during the financial year ended 31 December 2018. The time limit for filing the SAO certificate and company notification was 30 June 2019. Mr Schmidt filed an accurate SAO certificate on 29 June 2019 but the company did not notify the identity of everyone who had acted as SAO during that FY until the CCM prompted it to do so, on 30 August 2019.

Bigcorp PLC was therefore liable to a penalty for failing to notify the identity of its SAO in that period. Further investigation revealed that the company had not notified the name of its SAOs in previous FYs.

The certificate provided on 29 June 2019 was printed on Bigcorp PLC headed paper, clearly referred to the financial year ended 31 December 2018 and listed the companies to which the certificate related. It was signed by Mr Schmidt in his capacity of SAO and included his contact details.

Therefore, the SAO certificate included most of the information that should be shown on a company’s notification (see SAOG13200). The main piece of information not shown on the FY18 SAO certificate was the name of each person who acted as its SAO at any time during the year. A quick check of earlier years’ documents showed that Mr Schmidt had also signed the company’s SAO certificate for FY17 and a brief exchange of e-mails between the CCM and Mr Schmidt confirmed that he had continuously acted as SAO throughout FY18.

It was clear that Bigcorp PLC had engaged with the SAO regime and there was no evidence that Mr Schmidt had failed to comply with his main duty during FY18 or earlier years. The company supplied returns for all relevant taxes within the SAO regime and paid its tax on time. Taking a common-sense approach, weighing-up the company’s compliance history and the nature of the notification failure, an SAO penalty would not serve the overarching compliance intentions of Schedule 46 FA09 (see SAOG10100 onwards).

Therefore, HMRC should exercise its discretion not to charge a penalty under paragraph 7 Schedule 46 FA09. The CCM reminded Mr Schmidt that, in future years, the company would be obliged to supply all information required to satisfy the paragraph 3 notification obligation in writing, by the time limit. This could be achieved by adapting the annual SAO certificate to include confirmation of the names of every person who had acted as SAO in a financial year.

Example 3 – dormant company that holds assets

The SAO for Big Corporate Group PLC filed certificates for all active trading members of the group on time for the financial year ended 31 December 2019.

Further analysis of the group structure revealed that a dormant subsidiary, Big Corporate Brazilian Holdings Ltd (“Holdings Ltd”), was omitted from the certificate and that company did not notify the identity of each person who had acted as its SAO in that year.

Whilst it had never traded in its own right, Holdings Ltd had been incorporated in 2015 to acquire the share capital of a company trading in Brazil. The accounts for the APE 31 December 2018 showed that Holdings Ltd made a loss of £4 million because of the impairment of its holding in the Brazilian company and interest paid on a loan from Big Corporate Group PLC.

Whilst Big Corporate Brazilian Holdings Ltd did not receive any income or make a profit in the financial year ended 31 December 2019, it did hold assets capable of producing profits, income or gains in the form of its holding in the Brazilian company.

For the purposes of charging SAO penalties, we would normally apply the definition of dormancy at COM1040 – that is, that a company is dormant if it:

• does not receive any profits or income;
• holds no assets capable of producing any profits, income or gains.

The impairment of an asset and payment of interest to a group company are transactions for which Holdings Ltd would have needed to maintain appropriate tax accounting arrangements in the year in which they happened – in view of possible impacts on tax payable by other companies in the group.

Therefore, the fact that Holdings Ltd was a dormant company during the financial year ended 31 December 2019 is not sufficient reason to exercise discretion not to assess a penalty on the SAO for omitting it from the group’s certificate or on the company for omitting it from its SAO notification. A risk assessment indicated that Holdings Ltd should have maintained tax accounting arrangements in the year in question and that some of its transactions represented risks for some of the taxes within the SAO regime.