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

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.