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In all material respects?

How is this defined for SAO?

In all material respects? How is this defined for SAO?The SAO legislation defines ‘appropriate tax accounting arrangements’ as ones which enable tax liabilities to be calculated accurately ‘in all material respects’. Does this mean the level of materiality used for financial reporting purposes apply? No, HMRC is pretty clear it doesn’t mean that.

HMRC has also made clear that they won’t be chasing SAOs for penalties for taxes that are not penny perfect every time. So, how do you strike the balance? HMRC’s guidance does not establish any ‘safe-harbours’ but it does provide some useful rules of thumb, each of which should be considered in the context of your relevant tax/business.

For example, where you have a large volume of transactions (e.g. employee expenses, Accounts Payable) it appears that it is accepted that tax treatment of a certain proportion of these may well be incorrect in any given year. To the extent that a business has some preventive controls (guidance for staff etc) and undertakes appropriate sample-based testing and reconciliations of the output data with errors disclosed and rectified, then they will be regarded as having arrangements in place that enable liabilities to be calculated accurately.

In contrast where there is a one-off transaction with significant tax implications, it is expected that the treatment of this will be correct each and every time. Thus, appropriate tax accounting arrangements would require each application of the substantial shareholdings exemption to the gain on the disposal of a shareholding to be correct.

Finally, HMRC is clear that even where an error is relatively small in the context of the volume and value of the transactions involved, as in the first example above, a recurrence of the same error in a later year would not be accepted. So having detected such an error it is crucial that action is seen to be taken to rectify it.

Given that the legislation does not import its own definition of materiality for taxes, we may assume that the same standard of care applies as under pre-existing tax law. You will have developed your own sense of what was ‘material’ in the context of voluntary disclosures to HMRC and it makes sense to extend this to apply to SAO. Your CRM will be key in applying SAO requirements to your business and, as you engage with them around SAO and broader compliance, you may wish to try and agree a mutually agreed level of ‘materiality’ by tax.


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