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New penalties – how you can help your client. By Rebecca Benneyworth

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19th Jun 2008
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adviceTop tax lecturer, Rebecca Benneyworth offers more practical advice on the new penalty regime; engagement letters and client support...

Having reviewed the structure of the new penalty legislation in some detail, I now consider what the advisor can do to support his client in the new system.

First, why should an advisor be concerned about the impact of the new penalty regime on his client? Well the answer is simple, if you see your role as helping your client to comply with his tax obligations – which most of us acting for smaller businesses do. Your client has an obligation to submit a return and pay tax on his income promptly as required by the law. But he is now also statutorily required to take reasonable care regarding his tax affairs, or face sanctions, so our role must also extend to advising him about what that means and how he can achieve it with the minimum of fuss and additional expense.

Taking a client engagement for basic tax return completion for a small business from first principles, the following areas are worth considering.

Letter of engagement

It is useful to remind your client of his obligations under the law and that the law expects him to take reasonable care over his tax affairs. That is the basis on which he has engaged you to perform your services, and it is probably worth setting out for him what HMRC has said in relation to this. It is that he will not be liable to a penalty if he takes reasonable care to ensure that his returns are accurate, despite them being prepared by an advisor or agent. This means he should:

  • Appoint a competent advisor or agent
  • Provide the agent with all of the information he needs, and
  • Check the return as far as he is able before authorising its submission.

Taking the first of these requirements, we might first consider our internal process before looking outwards. What constitutes a competent advisor is still quite a tricky issue, and HMRC would not be willing to recommend one or other particular qualification as 'competent'. Rightly so, and this will be a difficult area; we must also accept that unqualified accountants can quite easily be competent, just as there are less competent members of professional bodies. One can only assume that having behaved reasonably in the selection of an advisor, the client would have no problem. However, there may be an internal quality issue here. Should firms limit the advice that members of staff are permitted to give to clients to ensure that it is delivered by a competent individual? I would expect such considerations to be in place for PI purposes, but how does this issue of competence impact on the review of work carried out by junior staff and so on, particularly in very small firms?

Requests for information

We could consider both the timeliness and completeness of information here. If the full information is not supplied until late January, then it would be difficult for our client to argue that he is taking care over his tax affairs, particularly if we have been chasing him for the information for months. It is worth therefore making clear to the clients that late submission of information can impact on the level of penalty at the outcome of an enquiry. If the threat of a £100 fine has not served to prompt him to action before, then maybe this will galvanise him. You might also think about how you evidence the information supplied and in particular any missing data, and how this is followed up. It is important to remember that at the penalty phase you will need evidence that your client took care to support your arguments. Clearer and more specific requests and follow up letters will be the likely outcome of this.

Checking the return

No sane agent would submit a return which has not been checked and signed by his client. But how is the actual check of the return properly evidenced? The signature on the return does not actually evidence that it was checked, just that it was signed at some point – this may have been before it was completed! The client needs to check the return 'to the best of his ability'. In general, small business clients would not be able to spot a calculation error or some technical mistake. However, he should be able to point out the absence of a source, or the omission of a benefit in kind, if he checks the return carefully. How many could spot an error in the voluminous number of pages presented to him? Might it be worth preparing a simple summary of the types of income reported on the return and the amounts, so that the client can sign this as approval of the data? I am pretty sure that most tax software should be able to provide a simple one page summary for approval with a bit of effort – it is certainly something that my software company is working on.

Wider issues

The basic minimum expected of any business or personal taxpayer is that they have a system of records designed to ensure that the correct income is declared for tax purposes. Although we shall have detailed statutory record keeping requirements later this year (as a result of the Finance Bill 2008 proposals) this is really a separate consideration. So can we look at our clients' basic systems and make recommendations which would help the integrity of their records? Do they regularly lose paperwork? Can we provide a simple box file which will enable them to keep everything together (and even serve as an advertisement and reminder about due dates)? This might suit personal taxpayers who have shown themselves to be disorganised with paper, for example in relation to rental property. Are your clients' books and records up to a basic minimum so that they could be said to form a basis for the tax return? What recommendations can you give to improve the records, and indeed save you time and your client money? The message on records is not a new one, but it is possible the new penalty regime will help drive it home in a way that has not been possible before.

So helping your client to take care is a major area for developing the client relationship. Finally, what about those who have failed to take sufficient care? Then our interest here, having identified a problem, is to make recommendations to our client about prompt and full disclosure, before HMRC challenge the return, so that our client can benefit from the full discount for disclosure, and in the ideal world come out with zero penalty. For more on this aspect see the article Zero penalties – a thing of the future'.

Links to previous articles in this series:

New penalties: Take care now!

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By Rebecca Benneyworth
24th Jun 2008 09:34

Thanks Mark
Mark and I havediscussed this, and it is probably a question of degree.

My own view is that the requirement to take reasonable care is so fundamental to our engagement that I would prefer to see it stated at the outset. I shall agree to act for my client on the basis that he will take care over his affairs - I don't see this as an unreasonable basis on which to agree to act for someone.

However, it would also be possible to deliver this message at other times, and of course others will perhaps regard this as a secondary message, better delivered elsewhere than in the terms of the engagement.

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