This week, Rebecca Benneyworth looks again at the “Working with Tax Agents” issues, considering some of the examples provided in HMRC’s consultation of the areas where HMRC would like new powers, and seeks to move the discussion on.

Last week’s study of the suggestions in the consultation about exactly what powers HMRC were considering drew considerable adverse comment from members, but much of this was directed at HMRC. While there may be issues with the front line service provision, these must be regarded as a separate issue to raise with HMRC, and cannot be allowed to interfere with active debate on the subject of powers in relation to agents.

The simple fact is that this consultation is not being carried on for the pleasure of it, nor to purely explore views on the subject. It is intended to (and will) lead to specific powers which will no doubt appear in the Finance Bill 2010. These powers will happen whether the profession engages or not, so it is essential that those in tax practice get involved in constructive debate about what might be acceptable.

I suspect that much of the unexpressed (so far) concern is that any powers could end up being used widely or inappropriately and that this would erode confidence in HMRC and ultimately further damage the relationship between tax agents and the tax authority. However, this misses the point. The first design objective (see last week’s article [1]) is to reassure competent agents, both by assuring them that new powers are not aimed at them, and that the new powers will remove the absolutely incompetent and essentially fraudulent agent from practice. This must be of benefit to us, as it improves the profile of the entire profession, and with self interest in mind, both relieves us from the trouble of clearing up after these people and releases their clients for the better agents to provide a good service to.

We shall have to take on trust the fact that HMRC are not intending to use the powers against agents when it is not appropriate to do so – but we can also recognise that it is not in the authority’s interest to do so – we act for around 80% of businesses, and a significant proportion of private tax clients, so damaging the relationship with good agents would be madness for HMRC. Let their own self interest drive the effective application of adequate safeguards, which we must ensure are placed in the legislation.

So let’s roll up our sleeves and start thinking about what might work. There are essentially three areas where HMRC has expressed an interest in gaining power to act against agents. This week, I shall consider mistakes by agents.

Mistake

The consultation document gave me some worries on this subject as the suggestions seemed draconian, but on deeper consideration this is probably the most important area, as any agent could (and probably does) make an occasional mistake. The current penalty legislation in Finance Act 2007 accepts that “we all make mistakes” and offers no penalty on a taxpayer for a genuine mistake, when reasonable care has been taken. The proposals looked at the possibility of introducing a penalty for mistakes by agents (which could be suspended) and a process which would enable HMRC to check whether the same mistake had been made on other cases. Some parts of the proposals seemed unduly onerous from the agent perspective, including the idea that the agent would appoint an independent reviewer to ensure that any similar errors had been identified and corrected.

Should a professional agent be permitted to make the odd mistake, or are we – uniquely - expected to be perfect? I think that a system which does not allow us to make the occasional error would be of real concern. So how do we phrase a power to ensure that if a mistake is more than a one-off it is addressed without delay? For example, if an agent was unaware that AIA was not available on cars, he might have claimed the allowance for all of his clients. If HMRC discovered this error on one client, it is natural that the agent would feel defensive and be unwilling to go back to other clients and tell them that he had made a mistake, and that they had to pay more tax as a result. How would HMRC then address this? Or, it is possible that the agent knew that AIA was not available on cars, but that he had a “senior moment” when preparing the capital allowances computation and forgot (just once) to exclude the expenditure from the claim. Same mistake, but very different outcomes for HMRC in seeking to ensure that returns are correct.

So the risk is that one mistake might be many mistakes of the same nature. And could HMRC rely on the agent voluntarily arranging to correct every instance of this? I suspect that some agents would be reluctant, and would consider finding these mistakes HMRC’s job. But if that is the outcome, then a significant number of clients from that agent should be selected for compliance check. Is that what we would prefer? It exposes all of us to this outcome, even where a one-off mistake has genuinely been made.

We have to accept that with a risk driven operation, then logically the discovery of an error made by an agent has to lead to consideration that this represents a risk that (a) the agent has made the same mistake in relation to other clients, and (b) the agent is likely to have made many other mistakes of a different nature, as this error is an indication of poor technical skills.

Your comments needed

So the first area for members to comment on is what happens when the agent does make a mistake? How should HMRC distinguish between a single instance of an error and one which is systemic? Can we run a “three strikes and you’re negligent” operation, which takes us beyond the consideration of a simple error to overall incompetent? Should membership of a professional body lead to an assumption that the error is a one-off unless proved otherwise by experience? Can we rely on agents to correct similar mistakes when they find that they have been wrong about something?

Please give us your views, as we are intending to collate our collective thoughts into a response to HMRC on this document.

Last week's features included an article on the rationale behind the need for powers, including "Working with tax agents - the issues" [2] a summary of the design principles behind the powers, and "Working with tax agents - the specific proposals" [3], a summary of the sorts of powers that HMRC are considering introducing.