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Government plans unusually strict standard of ‘careless failure’

"Careless failure" is the seemingly innocuous expression used by the Government as the front of its plans to place a personal liability on companies' senior accounting officers for accurate tax reporting.

The proposal which is neatly enveloped in the latest budget is to apply the grossly strict standard of carelessness against all nominated senior accounting officers (Invariably the Finance Director), in the course of their establishing and monitoring systems for accurate tax reporting.

The legislation will apply only to companies which are “large” by definition under the Companies Act. A company is large if it meets at least two of the following criteria: - Turnover greater than £25.9m, Balance Sheet total more than £12.9m, number of employees greater than 250.

The liability for careless failure is personal to the officer in question and is apparently ultra harsh (bearing in mind the apparent ease by which it may be breached) when considering the greater levels of failure expected (negligence or fraud) in other offences which attract personal liability.

The standards expect the individual charged with the responsibilities of the finances of the company to certify the accuracy of accounts and expect personal financial repercussion in the event that certification is found to be misguided, even if this is a result for instance of an oversight or a failure of internal systems.

Whilst no case has been brought to a conclusion on the point, it appears that the incumbent individual will impose on himself personal liability for any inaccuracy or error, no matter how minor. This may also include the unfortunate circumstance of a tax planning scheme being ruled to be unlawful notwithstanding the mistaken belief of the director at the time of certification that the scheme was legitimate.

The personal liability suffered manifests as a fine, the top level of which could be as much as £5,000.00. Whilst no form of intent or deceit is required to achieve the offence of carelessness, the harsh level of personal liability is not so reflective. It will be a matter of observing how the measure is enforced to obtain guidance on what levels of carelessness and erroneous beliefs or actions attract what level of penalty.

Guidance suggests companies which are covered by the legislation must ensure that:

• Senior accounting officers to establish and monitor adequate accounting systems;
• Such officers to certify the systems are adequate or specify the nature of any inadequacies and confirm they have been notified to the company's auditors;
• Companies to notify to HMRC the identity of the senior accounting officer

It would also be very prudent for directors and officers insurance to be extended to cover accounting officers against the fees incurred in defending any claim made. Unfortunately cover is not available for any penalties or fines levied.

Pearson Hinchliffe Commercial Law can advise you on matters related to personal liability and 'careless failure'. Click here to speak to a specialist commercial lawyer.

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