SAOG18850 - In what circumstances is a penalty chargeable: exercising discretion whether to assess an SAO penalty
Schedule 46 penalties (see SAOG18200) are intended to deter non-compliance with SAO legislation (see SAOG10100 for the compliance intentions of the SAO regime). Paragraphs 4, 5 and 7 Schedule 46 FA09 are expressed in terms of strict liability (meaning that a company or an SAO (as appropriate) will be liable to a penalty if they fail to comply with their obligations by a specific date). Paragraph 9(1)(a) confers discretion on HMRC whether to assess that penalty, by stating that HMRC ‘may assess the penalty’ (Castlelaw (No 628) Ltd & Irene Douglas v HMRC ([2020] UKFTT 0034)).
In Castlelaw the tribunal highlighted a number of factors that HMRC ought to have considered in deciding whether or not to charge penalties:
- HMRC’s Business Risk Review (BRR) gave an overall impression of a group that has ‘proper regard for its compliance obligations and has in place proper measures and personnel to deliver’.
- HMRC’s assessment of the group’s behavioural risk was ‘Low’.
- The group paid the right amounts of tax at the right time.
- The group’s organisational structure included a substantial number of dormant entities that were either holding companies or special purpose vehicles.
- The failures in question related to two dormant companies (including Castlelaw) which had no ‘accounting footprint’ in the group – that is, they had no liabilities to any of the taxes included in the SAO regime (see SAOG10300), thus did not need tax accounting arrangements.
- The group participated in a collaborative working arrangement with HMRC.
Our policy on the exercise of discretion in SAO penalties
A decision to assess an SAO penalty in a particular case should not only consider whether an SAO or company is strictly liable to a penalty, but also take account of the nature of the failure in question, the level of tax risk, whether the failure is symptomatic of any underlying weakness in tax accounting arrangements, and overall compliance including compliance with the SAO regime.
We will not normally seek to assess penalties where a group of companies or an SAO omitted details of dormant companies where a risk assessment indicates minimal requirement for tax accounting arrangements.
The exercise of discretion does not disapply the requirement for SAOs to carry out their main duty or to file accurate, timely certificates, or for companies to notify the identities of their SAOs.
Where we exercise discretion not to assess a penalty, certification or notification omissions or errors should be rectified and resolved during routine customer relationship management in LB or enquiry casework in MSB.
Decisions to exercise discretion in a particular case should be documented and explained to customers. Whilst each case should be considered on its own merits, we would not normally exercise discretion to not assess an SAO penalty for a financial year if we have previously given a customer advice to assist with their future compliance.
Unlike reasonable excuse, see SAOG20000, a customer does not have a right of appeal against a decision by HMRC not to exercise its discretion over the assessment of a penalty under the SAO legislation. However, customers may make representations that HMRC should exercise its discretion not to charge a penalty and provide supporting evidence to that effect. Whilst they will normally make representations before a penalty is assessed, they may do so at any stage in the process.
See SAOG18875 for examples.