Tax agent accused of dishonest conductby
Andy Keates examines the first disputed case of HMRC using its powers in FA 2012, Schedule 38 to apply civil sanctions against a tax agent for his dishonest conduct when acting for a client.
What is “dishonest conduct”?
The legislation specifies four possible scenarios where action, or omission of acts, by the tax agent may enable the client to:
- account for less tax than required by law;
- obtain more tax relief than allowed by law;
- account for tax later than required by law; or
- obtain tax relief earlier than required by law.
The dishonest conduct can take the form of:
- a positive action by the agent;
- dishonestly omitting to do something; or
- advising or assisting a client to do something that the [agent] knows to be dishonest.
It doesn’t matter whether the action/omission actually succeeds in bringing about a loss of tax revenue; what matters is the intention behind the action.
The tax agent may be guilty of dishonest conduct even if he claims to be “only following the client’s instructions”.
What can HMRC do?
Schedule 38 of Finance Act 2012 provides HMRC with powers to take steps against dishonest conduct by tax agents. These civil powers are an alternative to criminal prosecution.
The first stage is the issue of a conduct notice, which can only be issued by an “authorised officer”. It sets out the grounds on which HMRC believes the agent has acted dishonestly.
The agent has the right to appeal against the notice within 30 days of issue, and any further steps, such as obtaining the agent’s client files, issuing financial penalties or publishing information about the agent, can only be taken once the appeal has been settled.
A conduct notice was issued to Rodgers on 13 September 2016. He asked for an internal review, and then appealed to the first tier tribunal (TC06617).
What had Rodgers done?
Rodgers acted for Ferguson for both VAT and income tax returns. Ferguson’s business records included a number of false purchase invoices for expenditure which he never in fact incurred.
These enabled him to boost his input VAT and to understate his trading profits between 2011 and 2015. HMRC calculated that the VAT liability was understated by £12,000 and the income tax liability reduced by £10,000.
During a meeting with HMRC to discuss the enquiry into Ferguson’s tax affairs, Rodgers confessed that he had created the false invoices on his own computer. He had done this at his own suggestion, in order to help out his client by easing his tax burden.
HMRC confirmed that it would not be seeking criminal prosecution against Ferguson. But the HMRC agent compliance team held a subsequent meeting with Rodgers regarding his part in the affair.
Rodgers asked the officers whether he would face prosecution; they responded that “it had been decided not to prosecute based on the information currently held but that [Rodgers] should not destroy any documents and HMRC reserved the right to consider criminal proceedings if a full disclosure of any dishonest conduct was not made”.
Once again, Rodgers confirmed that he personally had produced the false invoices, and that it was his idea to do so as his client did not have sufficient knowledge to do this.
Why did Rodgers appeal?
His grounds for contesting the conduct notice were:
- He had been given unequivocal assurances that he would not be prosecuted, so that the issue of the conduct notice was a breach of a promise; and
- Although he assisted his client to understate his tax liabilities, his actions in so doing were not deliberate or dishonest.
Rodgers did not attend the hearing, so the tribunal was unable to question him more closely, particularly on the second claim.
1. Assurances of non-prosecution
HMRC’s reassurances on criminal prosecution at the first meeting were addressed only to the client. Since Rodgers had not at that stage mentioned his own conduct, it is hard to see how he imagined that he was included in them.
Neither then nor at the second meeting (which did directly address Rodger’s own involvement) was any suggestion given that HMRC would refrain from using its civil powers. Indeed, at the second meeting HMRC specifically discussed the actions available to them from FA 2012.
2. Actions not deliberate or dishonest
The judge noted: “To create and submit documents knowing them to contain false information and with the intention that HMRC would rely on them to calculate tax liability, with the potential or likely consequence of the right amount of tax not being paid to the exchequer, would be characterised as dishonest by any ordinary standard”.
Given that the job of a tax agent is to ensure that his clients submit knowingly accurate responses to HMRC, it is hard to see how Rodgers could believe his actions to be honest, or how objectively they could be considered honest.
As the appeal failed, HMRC now can take further steps. No doubt a penalty (between £5,000 and £50,000), and some “naming and shaming” will follow.
HMRC will also look very closely at Rodgers’ files for every single client he has ever acted for.
It is regrettable that the first FTT outing for this piece of legislation should have featured an appeal of such scant merit.