Tax guidance for the profession in troubled times

The Chartered Institute of Taxation (CIOT) and Association of Taxation Technicians (ATT) have released an updated edition of Professional Conduct in Relation to Taxation (“the guidance”) which replaces the February 2014 version.

Why is this guidance important?

The new guidance states:

‘The guidance includes further commentary to reflect the ongoing developments and the public concern about aggressive tax avoidance and evasion. This update does not include any specific changes following the paper published by HM Treasury and HMRC on 19 March 2015 Tackling tax evasion and avoidance. This paper asks

“ the regulatory bodies who police professional standards to take on a greater lead and responsibility in setting and enforcing clear professional standards around the facilitation and promotion of avoidance.”

This puts it in a nutshell – at a time of unprecedented public and political interest in tax the tax profession is coming under increasing pressure to be seen to take the lead in the campaign against ‘aggressive’ tax avoidance. On the other hand, tax professionals have a duty to their clients to mitigate tax within the law. The guidance addresses these two competing pressures.

Tax advice

The guidance sets out that tax advice covers a variety of activities. The guidance states:

‘Tax planning is legal and taxpayers are entitled to enter into transactions that reduce tax or to take interpretations of legislation that HMRC may not agree with. If HMRC wishes to challenge a particular transaction or interpretation, it may amend the return or issue an assessment accordingly. The client may then appeal against HMRC’s decision through the tax tribunal and courts if necessary with the associated costs and disruption. Ultimately only the courts can determine whether a particular piece of tax planning is legally effective or not. However a member should always advise the client that there may be wider reputational issues in such circumstances.’

The guidance states that despite attempts by the courts over the years to elucidate tax ‘avoidance’ and to distinguish this from ‘acceptable’ tax planning or mitigation, there is no widely accepted definition.

‘Publicly, the term ‘avoidance’ is used in the context of a wide range of activities, be it multinational structuring or entering contrived tax-motivated schemes. The application of one word to a range of activities and behaviours oversimplifies the concept and has led to confusion.’

HMRC’s view of what is ‘acceptable’ tax planning

In March 2015 HMRC issued ‘Tackling tax evasion and avoidance’. In this document HMRC provides its view on the question of ‘What is tax avoidance? The guidance quotes from this, as a ‘a useful sense check for members.’

‘Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter – but not the spirit – of the law’.

‘Tax planning involves using tax reliefs for the purpose for which they were intended, for example, claiming tax relief on capital investment, or saving via ISAs or for retirement by making contributions to a pension scheme. However, tax reliefs can be used excessively or aggressively, by others than those intended to benefit from them or in ways that clearly go beyond the intention of Parliament’

Part of HMRC’s website ‘Tempted by Tax Avoidance’ sets out, inter alia, what HMRC views as typical characteristics of a tax avoidance scheme that taxpayers and their advisers should be wary of. These characteristics have the following broad features:

If it sounds too good to be true it probably is.

Tax results out of proportion with commercial or economic risk or activity.

Over complexity, artificial or contrived steps, or circular money flow.

Offshore entities or tax haven countries are involved for no good reason.

Secrecy or confidentiality agreements.

The arrangement has a SRN assigned under the Disclosure of Tax Avoidance Scheme Rules (DOTAS).’

Impact of the GAAR

The guidance stresses the importance of the GAAR and states that members should be aware of its scope and potential application and put appropriate measures in place, such as training and raising awareness of the new rules with clients and internally in the firm, commensurate with the size of the practice.

Responsibility of the member for giving tax advice

The guidance sets out some key points for its members:

A member is required to act with professional competence and due care within the scope of his engagement letter;

A member should understand his client’s expectations around tax advice or tax planning, and ensure that engagement letters reflect the member’s role and responsibilities, including limitations in or amendments to that role;

A member does not have to advise on or recommend tax planning which he does not consider to be appropriate or otherwise does not align with his own business principles and ethics. However, in this situation the member may need to ensure that the advice he does not wish to give is outside the scope of his engagement. If the member may owe a legal duty of care to the client to advise in this area, the member should ensure that he complies with this by, for example, advising the client that there are opportunities that the client could undertake, even though the member is unwilling to assist, and recommending that the client seeks alternative advice. Any such discussions should be well documented by the member;

…..The member should ensure that the client is made aware of the risks and rewards of any planning, including that there may be adverse reputational consequences…..;

Any tax advice on planning should consider:

The technical implications including the strength of the legal interpretation relied upon, the potential application of the GAAR and the risk of a successful challenge by HMRC; and
Practical considerations such as the issues involved in the implementation of the planning arrangement; possible disclosure under DOTAS and the potential for an accelerated payment notice; the reputational risk to the client and the member of the planning in the public arena; the stress, cost and wider personal or business implications to the client in the event of a prolonged dispute with HMRC; and if the client tenders for government contracts, the potential impact of the proposed tax planning on tendering for and retaining public sector contracts.

Monitored promoters

The guidance deals with situations where a member may be invited to introduce his clients to an arrangement from another source. The guidance is very clear in regard to monitored promoters:

‘Prior to considering the third party tax planning the member should ascertain whether the promoter is subject to a monitoring notice within the POTAS regime. The regime carries significant consequences for the monitored promoter, any introducer or intermediary of the monitored promoter and any client that uses a monitored promoter’s planning. If the third party is a monitored promoter within the POTAS regime it is difficult to envisage any circumstance in which it would be appropriate for the member to introduce their arrangement to clients.’

Conclusion

Ten years ago, giving advice used to be a much simpler business. Today, the twin forces of politics and public perception have made an adviser’s role much harder. Broadly:

An adviser must get the law right and give his client correct tax advice;
If he does not he may be subject to a claim for professional negligence;
However, he must also advise his client of ‘reputational issues’ connected to any particular planning advice he is giving;
Take a commercial view as to the how the advice might impact in terms of the implications to the taxpayer in the event of an HMRC challenge;
Keep HMRC’s view of what is ‘unacceptable’ tax avoidance in mind at all times;
Bear the GAAR clearly in mind at all times;
Ensure that any structure is accurately implemented;
Make absolutely sure that his engagement letter with the client clearly sets out the areas upon which the adviser will be giving advice and have the terms of engagement clearly in mind in his dealings with the client;
Keep up to date with a steadily increasing annual avalanche of new legislation.

To paraphrase Gilbert and Sullivan – a tax adviser’s lot in 2015 is not a happy one.

Levy and Levy – the tax investigations and resolution specialists in London and Tunbridge Wells.