Confessions of a tax adviser

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'Good morning. Please may I speak to Jane, the finance director?'

'I am sorry, she is out today. I am one of the finance team. Can I help?'

'No, thank you. Could you just let her know that I rang to discuss some of the tax issues arising on the forthcoming sale of the company?'

Long silence broken only by the sound of hysterical crying and the telephone being put down. This was followed soon afterwards by a summons to meet the senior partner, and then a hasty look at the job pages in Taxation.

This has never happened to me, but such nightmares do occur and I know somebody who did something very like this (and no I am not going to reveal names…). All of the technical knowledge we carefully build up over the years is as naught compared with one momentary lapse of concentration. But in this special edition I can't simply say 'there but for the grace of God go I'. Instead, I have to share with you some of my own tax nightmares.

Where to begin

There was the time I was asked to ring a lawyer to discuss a tax point arising on a sale of my client’s  company.  It was only after I had started the call, that I realised that I had no idea whether he was acting for my client or for the purchaser! I made some carefully non-committal remarks and played for time as I tried to work out whether I should say that the proposed indemnity was far too generous or completely lacking in teeth.

On another occasion , the memory of which still causes me to shudder, I was carrying out a planning exercise for a client and completely failed to notice that the £3 million profit figure had brackets round it. That took some getting out of. In case any of my current clients are reading this, I should say that was a long time ago; I have people to do sums for me now.

There is a positive side to some of these horrors, one of which is that you never make the same mistake again. So here, in case it helps, are a couple of my own learning experiences.

Disaster averted

My first horror concerns accounting periods. We learn the rules for accounting periods in exams, but all too often we fail to recognise situations in which they apply in practice. I recall working on a reconstruction in which we had large capital gains at the beginning of the year and a disposal that would create a loss later in the year. All well and good: the gain and loss were in the same 12 months and could therefore be offset.

Then one night, thankfully before the transaction had completed, I woke at about 3am and realised that as part of my reconstruction plan we were moving the trade out of the company after the gain had been triggered but before we had crystallised the loss. The result would be that an accounting period would end when the trade ceased and new accounting period would begin. The loss would thus be in a later accounting period and could not be offset by the loss.

Luckily, I was able to sort out that potential problem in time and we were able to re-order events, but it was a close run thing. After that I have never failed to ask anybody who is doing a piece of corporate work for me what the accounting periods are. It is surprising just how often they create problems.

My second horror is a more general point about the use of language. I cannot remember which relief we were dealing with, but it was vital that the company concerned was trading. I explained this detail to the audit partner and he assured me that it was. So all seemed well, but some sixth tax sense came into play and I went back to him to discuss it further. It then became clear that we were using words in different senses. I was using the word 'trading' to mean a company that carried on a trade rather than an investment activity; he was using it to mean active rather than dormant. Each of our definitions was valid, but disaster nearly happened because the company was indeed an investment company and would not have qualified for relief. So it was back to the drawing board again.

Avoiding a catastrophe

So what is my best advice for avoiding Halloween nightmares? Surprisingly perhaps it is not to treble or quadruple check everything. Proper review processes are necessary, but if you get into the mindset that you will always check something one more time you eventually paralyse any ability you have to give advice. Proper scepticism and enquiry is the mark of a good adviser: crippling self-doubt neuters you.

My advice is to develop the ability to stand back and ask the simple questions: what I call the 'Janet and John' approach. (If this means nothing to younger readers, have a word with your older colleagues; they will probably while away the next ten minutes in nostalgic reflection about the good old days.) When my team are explaining tax ideas to me I always get them to reduce their ideas to the simplest possible diagrams on the whiteboard and encourage them to explain what is happening in straightforward non-tax terms by asking a few pertinent questions, such as:

●     'At the end of this process where is the money?'

●     'Is the employee better off after doing this?'

●     'Who owns this company now?'

It all seems pretty obvious, but it is surprising how often people get deep into the technicalities before they have got the big picture in their heads. In my experience, the fewest mistakes are made by those who can stand back and understand what is really happening in a transaction.

But what if you are in a meeting and you have no idea what anybody is talking about? Suddenly everyone turns to you for the tax advice? You need to develop a few lines which will impress everyone in the meeting and make them all feel as if they have missed something. The illusion is even more effective if you take off your glasses and stare into space before you speak. Two of my favourite opening gambits  are:

●     'Do you think we have a Zim Properties point here?' That is always a good diversionary tactic because if you look hard enough you can always find a Zim point (see Zim Properties v Proctor [1985] STC 90). Usually it is totally irrelevant, but while everybody is feeling nervous because they haven't spotted it, you can gather your thoughts and get to the real point.

●     'But aren't they employment-related securities?' That always gets people going and encourages them to show off their knowledge of just how wide the definition is and problems that they had on past transactions. It gives you cover to retain your composure and identify the real issues.

One of these two lines will generally act as a 'get out of jail free' card. If they both fail then the only thing left is to knock your glass of water all over the papers on the table. As you go out to get the paper towels you can have a quick word with somebody in the office to see if she knows the right answer.

No, not that! My worst nightmare of all, however, is that the Chancellor stands up on Budget day and says: 'The temporary experiment to introduce an income tax has been reviewed and we have decided that, as the country's economic circumstances are now so strong, income tax, and all other taxes, will be abolished at midnight tonight'. Sweet dreams

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