The Chartered Institute of Taxation has published final guidance on professional conduct standards to be applied by advisers when giving tax advice.  This publication is timely in light of recent debate as to the extent to which accountants may legitimately advise clients on tax planning.  HMRC has approved this guidance as an acceptable basis for its dealings with tax advisers.  We have increasingly seen PI claims against advisers who have had a hand in tax mitigation schemes and this note provides some guidance based on our experience of these complaints.

General Points

The Guidance provides examples of situations likely to confront tax advisers, but advisers must observe fundamental principles of integrity, objectivity, professional competence and due care, confidentiality and professional behaviour across all their professional activities. 

In addition to the overriding principle of demonstrating integrity at all times, particular themes stressed throughout the report include: the need to preserve client confidentiality in all situations other than where the law compels the adviser otherwise; the obligation that the adviser both understands and explains to the client the risks associated with tax-related decisions and the potential consequences of challenge; the importance of assessing money-laundering implications before and at all stages of financial transactions; and the criticality of documenting all advice given.  Advisers must also remain vigilant to the possibility of tax evasion when involved in what is ostensibly lawful planning.

Specific Points

Tax returns:  Advisers must act in good faith in dealings with HMRC.  An adviser must not assert a tax position which he considers has no sustainable basis.  An adviser must exercise appropriate professional scepticism when making statements or asserting facts on behalf of a client.  The adviser must ensure that the client understands his responsibility for the accuracy of the tax return and approves the return before submission, even if it is submitted electronically.  

Compliance with HMRC:  The Guidance distinguishes between informal requests from HMRC and the exercise of their statutory powers.  Disclosure in response to informal requests can only be made with the client’s permission.  The adviser should advise the client as to the reasonableness of any informal request and the likely consequences of non-compliance so that the client can decide on his preferred course of action.   With regard to statutory requests, especially those made under Schedule 36 Finance Act 2008, advisers are reminded that such a request may override the adviser’s duty of confidentiality to his client; failure to comply may expose the adviser to serious penalties.   

Irregularities: The Guidance provides a flowchart on steps the adviser should take, including informing HMRC or filing MLRO/NCA reports if appropriate. In essence, an adviser must inform the client as soon as possible of any error and its consequences and seek to persuade the client to behave correctly.  The adviser must also consider whether the irregularity could give rise to a circumstance requiring notification to PI insurers.  The adviser must take care that he or she does nothing to assist a client plan or commit any offence or conceal any offence which has been committed.  An adviser is not under a duty to make enquiries to identify irregularities which are unrelated to the work in respect of which he has been engaged, but if he does become aware of any irregularity in a client’s tax affairs he should follow the Guidance.  Where the client and adviser have complied with all their obligations under tax law and HMRC has failed to take any necessary action to start an enquiry or amend an assessment, the adviser is generally under no legal obligation to draw HMRC’s failure to their attention. 

Voluntary disclosure under special disclosure facilities: The Guidance warns advisers of risks associated with accepting engagements where a client is seeking to regularise tax affairs through voluntary disclosure of past evasion or concealment.  Before accepting an assignment, advisers must seek reassurance that the client will make a full and frank disclosure to the adviser and regularise his affairs in all respects.  The adviser must be mindful of the fact that tax regularisation can be a money-laundering tool.  Extra customer due diligence checks are required.

Tax planning, tax avoidance and tax evasion:  The Guidance refers to recent HMRC publications on tax avoidance and the General Anti-Abuse Rule (GAAR).  It points out risks to advisers resulting from involvement with tax avoidance schemes, including regulatory scrutiny or investigation and possible criticism from the media, Government and other stakeholders.  Factors that may indicate tax avoidance are listed.  The difference between tax avoidance and tax planning is discussed.

An adviser should be aware of the client’s expectations around the aggressiveness of tax planning or tax avoidance arrangements and ensure that the engagement letter reflects and limits the adviser’s role and responsibilities.  Ultimately, it is the client’s decision, having received advice, as to what planning is appropriate.  The adviser must however warn the client clearly of potential risks.  An adviser should not recommend any plan if the adviser concludes that it would be ineffective based on the GAAR or tax law.   Factors to consider and advise on include:  the strength of any legal interpretation (counsel’s opinion) relied upon; the potential application of the GAAR; implications in relation to the client’s tax return; the risk of HMRC challenge; the risk of litigation; reputational risk; stress for the person or business in the event of prolonged dispute with HMRC; or the potential impact on tenders for government contracts. 

Comment

We are seeing an increasing number of complaints against accountants, tax advisers and financial advisers arising out of failed tax mitigation schemes.  Much of the criticism concerns a lack of clear warning about the potential for HMRC challenges and the potential scale of the exposure if HMRC’s challenges are successful. While the Guidance strictly only constitutes advice given by the Chartered Institute of Taxation to its members, courts may find it persuasive as to the expected professional behaviour of all advisers operating in the tax sphere, such as members of the law society or even those operating in an unregulated capacity. All advisers should therefore consider putting appropriate measures in place commensurate with the size of their practice and the extent to which they are involved in areas which constitute tax planning/mitigation, including training, technical briefings and protocols to ensure quality and consistency of treatment and advice.  Clear engagement letters are critical, as are clear written advices explaining fully and frankly all the potential advantages and disadvantages of any particular course of action.  Proper records of face to face meetings at which advice is discussed are critical evidence if a complaint is later received.   

Further reading:

Chartered Institute of Taxation - Professional Conduct in Relation to Taxation - 24 February 2014

HMRC - Tackling Tax Avoidance - September 2012

General Anti Avoidance Rule