Firm denies MLR failure: ‘We’re not tax advisers’

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It is always a thorny discussion: what constitutes a tax adviser? While some make this claim without the support of any qualifications, a business hauled up before the first tier tribunal to answer money laundering failures went to great lengths to try and prove it did not provide advice.

Online Tax Rebates (OTR) based its business on small-fry tax rebates such as the cost of laundering uniforms, or the purchase of small tools under the flat rate expense rules

Potential clients were directed to click a claims link on the business’ website. Clients were then instructed to download a draft letter to HMRC (once they’d agreed to pay a standard £10 fee plus 24% of the refund).

The clients used the templated letter to detail what they would like to claim tax relief on, such as the laundry of their workwear, and once they had inputted their details they could print the letter off and send it to HMRC.

We’re not a firm

Because OTR claimed it was not a firm and informed, not advised, it believed that the money laundering regulations (SI 2017/692) didn’t apply to them. This was the reason why it opted for HMRC as a supervisory body as a precaution rather than a professional organisation such as the ICAEW. OTR’s belief was that its money laundering risk was low because “nothing we do should fall within that risk”

But the fact the firm dealt with taxpayers seeking advice would naturally class them as tax advisers, surely? Not according to the firm, who claimed its business model meant it did not deal with such taxpayers - it merely offered the same service as WH Smith selling wills or book authors explaining tax reliefs.

As you can tell, this was a tax tribunal based on semantics.

HMRC disagreed with OTR’s stance and imposed a £14,641 penalty (a £5,000 fixed fee, plus the maximum £25,000 variable penalty applicable due to the number of clients, although this was reduced by 50% as it’s the first offence).   

Did HMRC act with malice?

OTR argued that HMRC acted with “malice” when dishing out this ‘disproportionate’ penalty. Its reasoning emanated from their belief that HMRC’s true motive was “to discourage lawful tax rebates to customers which are rightfully due”. HMRC has repaid £70m to over 400,000 small claims for employment expenses since 2011.

Advising vs informing

Vendetta or not, the money laundering regulations do apply to anyone who provides tax advice. As HMRC outlined, a tax adviser means a firm or sole practitioner that provides advice about the tax affairs of other people.

But this was a tribunal submerged in definitions. Questions over whether OTR was a firm or a tax adviser led to both the regulation definitions and the Oxford English Dictionary (OED) being called upon.

The OED defines advice as: “an opinion given or offered as to what action to take”, while the regulation focuses on the business relationship between “a relevant person and a customer”.

However, OTR defined what they do as 'informing' taxpayers that a specific tax refund is available, not 'advising' clients of their entitlement. It tells the clients how much they can claim, but it doesn’t check any of the claims; that is up to HMRC.

More to the point: who are OTR’s customers?

So who are OTR’s customers? Despite the semantic arm wrestle, the tribunal found that since the clients sign a contract and OTR retains part of the refund, there is a relationship between the two and therefore, the firm is classed as a tax adviser.

After it was established that OTR had a business relationship with the clients, the breach of customer due diligence measures in the money laundering regulations carried more weight.

According to HMRC, OTR failed because it did not verify clients’ identities when it started its relationship. But OTR still contested, claiming that HMRC was its customer as it engages once with the individual, but its “one constant relationship is that with HMRC”; it added that by assisting claimants it actually “helps” HMRC. 

This was dismissed by HMRC’s counsel. Again the OED was dusted off, but no definition of 'customer' could support the OTR’s assertion.

How did the ‘business’ breach regulations

The back and forth over definitions may seem pedantic, but it gets to the heart of the case: OTR’s reliance on due diligence being carried out by third parties. 

Since the money that flowed through the company to the individual was paid by HMRC, OTR felt that no checks were required. However, OTR didn’t obtain consent from the third parties, and the regulations are applied to all relevant persons, which includes OTR.

While the small refunds come at an extremely low risk of being used to channel money from identity theft or payroll frauds, the tribunal noted that “the aim of the Regulations is not only to make it difficult for criminals to launder “dirty money” but also to prevent “lawful” money being channelled to terrorists”.

OTR should have verified its customers’ identity based on independent documents and data, and this should have been done before it entered a business relationship. But OTR only checked the name and address on the payslip to that on its system once money is received from HMRC.

The decision

The tribunal found the initial penalty was disproportionately calculated based on the number of the OTR’s clients, and the fact that its client base carried a negligible money laundering risk. The penalty was reduced to £2,500, which is half the £5,000 fixed penalty for a first offence, and the penalty relating to the number of clients was removed.

OTR has now set up with ICAEW as its new supervisory authority and is implementing money laundering checks so it can remain within the regulations.

However, this might not be the last we’ve heard of this case as HMRC has referred the matter on to the ICAEW investigation committee.

About Richard Hattersley

Richard is AccountingWEB's practice correspondent. If you have any comments or suggestions for us get in touch.

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23rd Mar 2018 10:54

This looks like another example of HMRC seeking to remove obstacles to the Juggernaut with as much prejudice as possible.

OK, so the firm may have transgressed, but perhaps a discussion and an admonishment to do better might have got a better press for HMRC?

Instead, they have applied the very worst case scenario from the get go and is an example of how HMRC is driving the trust out of ordinary "customers".

Can you imagine HMRC doing this with a bank or social media company that is able to hit back?

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to G Webber CTA
23rd Mar 2018 11:22

Agreed! It seems the brief for HMRC is to bully the small people who make up the mass of the populous and who generate most of the income for HMRC. No, I cannot imagine HMRC dealing with anyone that can fight back and particularly not the real "dirty money" launderers who riddle our nation. Makes you wonder where the corruption really emanates from!

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23rd Mar 2018 10:56

Online Tax Rebates (OTR)

Online tax rebates today, who knows what they will be know as next month, and as for their fees.

(once they’d agreed to pay a standard £10 fee plus 24% of the refund).

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to AndrewV12
23rd Mar 2018 11:28

76% less £10 of something is better than nothing, and it's legal not an avoidance scheme. HMRC don't like paying out at the best of times.

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23rd Mar 2018 12:22

This case has ramifications well beyond tax.
Following the extensive changes in regulation of insurance companies, in recent years:Many insurance companies set up online sales services, which in essence avoid the need (In their opinion) for the onerous business of their representatives going through the "Know your client" procedures.

If this case stands it could well be applied to insurance companies.

In any case I agree with the firm. following this there is no cost effective way for taxpayers to claim small refunds, up to say £100.
It is another case of a po-faced HMRC using a sledgehammer to crack a nut.

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By tedbuck
23rd Mar 2018 12:55

One could be forgiven for thinking that HMRC are doing this sort of thing for the publicity they get and to scare such firms away.
There was no need for such draconian action as one of your responders said a simple admonishment would have sufficed. This was a case of 'I will because I can and the taxpayer foots the bill anyway'. Certainly unfair for the subject of the case who must have spent a lot of money defending their corner.
Petty spite and typical of the thinking at the top of HMRC and the Treasury.

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23rd Mar 2018 13:00

From this tale I wonder if there are any grounds for HMRC itself being subject to the MLR regime; and if so is it? and if not why not?

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23rd Mar 2018 13:10

Picking up on whether HMRC should themselves be subject to regulation etc, the stream of letters we get from them, especially DMB, making suggestions as to how individuals should arrange their finances, mainly to pay amounts of tax not agreed to be due, is surely impinging on financial advice?

If I tried that, pretty sure I would be asked in short order what qualifications I had and under whose authority I was making suggestions.

We are trying to make some progress with the political establishment into a suitable body (PAC? TSC?) holding an enquiry into whether HMRC is fit for purpose.

Our experience is of a chaotic and incoherent organisation following unexplained policies in an ad hoc and often unfair way. I suspect that this is a result of incompetence and a lack of a motivated staff (we hear stories every week of low morale at the processor level in HMRC) rather than conspiracy, but surely even HMRC themselves should realise that being seen to be under the control of a Minister who is accountable is the first step to restoring some trust?

If they don't, we're all at the mercy of a runaway train.

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23rd Mar 2018 15:01

However I am looking at a level playing field. All of us have to register and if any of us thought we shouldn't we would take advice, especially as it is clear there is a legal relationship betwen the company and its clients (as there is between your business and your clients).

If it had been a free service there would not have need a need to register.

I agree HMRC have been heavy handed but what do you expect? Most have never run a business and their salary turns up every month at the same time.

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23rd Mar 2018 15:14

When the money laundering regs first came in they were never meant to apply to these situations. It was HMRC who couldn't believe their luck that poorly drafted legislation coupled with even worse scrutinisation of that legislation by those we elect meant they now had a gun they could place at the heads of all tax advisors. I have to regularly turn away "one off" small clients because the hoops I have to jump through are no longer worth it.

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By Akrigg
to martinhayward
23rd Mar 2018 15:41

Does make you wonder how those people who receive an unexpected "simple assessment" in the future are ever going to be able to get professional help. AML costs in addition to very tight query deadlines.

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23rd Mar 2018 15:15

When the money laundering regs first came in they were never meant to apply to these situations. It was HMRC who couldn't believe their luck that poorly drafted legislation coupled with even worse scrutinisation of that legislation by those we elect meant they now had a gun they could place at the heads of all tax advisors. I have to regularly turn away "one off" small clients because the hoops I have to jump through are no longer worth it.

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By Oppco
23rd Mar 2018 15:21

If HMRC did their job properly taxpayers would not have to use third parties to get their entitlements

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23rd Mar 2018 15:42

Thus is " termination with extreme prejudice " by HMRC.

Hammer. Nut. . Crack.

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By annmd
23rd Mar 2018 21:36

Very interesting case.
One might wonder what about all those sellers on freelancing platforms offering accounting services...?
Who is monitoring their AML compliance (if they are from India or USA)?
They clearly form a business relationship with the clients.

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26th Mar 2018 19:16

MLR has turned us into a 3rd world bureaucratic morass.
How come Arab and Russian kleptocrats can buy up London with impunity simply because their address is supplied in triplicate?

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