Chairman of the Tax Advice Network and BookMarkLee
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Tax schemes: What do you tell clients?

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10th May 2013
Chairman of the Tax Advice Network and BookMarkLee
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The recent negative media attention on tax avoidance and tax schemes has changed the landscape for accountants and tax advisers.

There are fewer tax schemes around but there remain two distinct stances that accountants tend to take:

  • “If it’s legal then it’s fair game. The government should close the loopholes if they don’t want them exploited.” 
  • “I’m uncomfortable with this concept and will tell my clients it’s not a good idea.”

Some accountants will continue to advise a client who wishes to proceed with a scheme, while others will refuse to have anything to do with what are typically considered to be abusive avoidance schemes.

A few weeks ago I posed a question in AccountingWeb’s ‘any answers’ in preparation for this article.

When a client has heard of a tax scheme that they have been told is perfectly legal, has the blessing of tax counsel and that the promoters have never lost a case in court, what do you say to add a dose of reality?

The challenge is that you want to convey your own understanding of the risks and downsides as well as your commercial and positive advice. Can you do both at once without losing the client or having them succumb to the promoter's sales patter?

This typically includes words to the effect that: "your accountant probably won't understand this, as it's quite sophisticated and not the sort of thing that simple local practitioners can follow".

You probably have better things to do than to look into the fine detail of every scheme that comes along, even if you do have a few clients who are prepared to be risk-takers

So, how do you do it? What do you say?

Most of the responses came from accountants who are uncomfortable with the concept of such schemes. 

A couple of specialist tax advisers defended the concept of playing the ‘game’ and one accountant expressed concern that his practice may be targeted by HMRC because a client had, against his advice, entered “what is clearly a quite aggressive scheme”.

The number of comments from ‘uncomfortable’ accountants suggests a huge shift in attitudes over the last few years.

When I was last in practice in the earlier part of this century, I was frequently asked to provide an independent view of tax schemes.

Even then I was frequently doubtful as to assurances provided by the promoters. There were often disturbing gaps between the instructions to counsel and the opinions being paraded to prove the scheme was legal.

I was also concerned that court decisions suggested the future outcome of then current schemes was less certain than ever before. I had been closely involved in decisions around the introduction of the Disclosure of Tax Avoidance Schemes (DOTAS) legislation and regulations.

I don’t recall ever confirming that a scheme was likely to prove successful. I stressed the risks, the consequences, the costs and the downsides and as a result I doubt that anyone who approached me went ahead with the schemes that had been punted to them.

They left disappointed but content with their decision. The time it took to review, understand and explain my conclusions of such schemes was probably uneconomic. 

This is why I have long maintained that there is no obligation on accountants to investigate new schemes; it’s not a good use of time unless someone is paying for it.

Some of the schemes back then emanated from Big Four firms. Most though came from niche tax practices or were being pushed by financial advisers. Typically such advisers were great at sales but did not really understand the tax system. I suspect such advisers still exist today.

Other discussion threads on AccountingWEB, such as this one, reveal that there are also some accountants who are happy to “help our clients to be tax efficient, using any legal means available”.  Some of the comments though suggest a degree of naivety, for example: “if these schemes are legal, why doesn’t the Government shut them down?”

The point often overlooked is that there is a difference between the legal right to try to reduce one’s tax liability, within the law, and the likely outcome of such efforts.

It may be legal to take part in an avoidance scheme, but that doesn’t mean the scheme will be effective. The effectiveness of a scheme will not be known with certainty for between five and 10 years, or longer. Anyone suggesting otherwise either doesn’t understand our tax system or is deliberately trying to deceive. 

We are all aware of the double standards that apply when anyone references morals in the context of tax avoidance. It’s wrong for big companies and for rich people but ok for everyone else to find legal ways to pay less tax. It's also okay to evade tax by not disclosing cash in hand receipts or by claiming personal expenditure as deductions from business income or to falsify business, or MP’s, expense claims.

Really? Sadly we cannot challenge everyone who moralises about tax avoidance about their own tax affairs.

What we cannot ignore is the potential reputational damage being caused to our profession by the media attention that is now shifting towards demonising the ‘clever' accountants. We are being maligned by reference to tax schemes that 'we' devised and for helping clients claim tax reliefs, i.e. the patent box regime.

It’s a travesty of the truth given the way that most accountants have done nothing dodgy or underhand. I recommend this thread started by Rebecca Benneyworth last year for a full discussion on the topic.

Returning to the topic of this article, here is a summary of the comments from the any answers thread on which I asked my question:

  • Check out the list of ‘tax planning to be wary of’ on the spotlights page of HMRC’s website
  • Ensure clients who want to proceed understand that they will be challenged by HMRC and all of the schemes customers will be subject to specific and detailed investigation. Participation in such a scheme would identify my client as someone "prepared to be involved in abusive tax avoidance or possibly tax evasion" and therefore at higher risk.
  • It will be years of stress and hassle as well as professional fees related to answering HMRC questions. All of this may or may not be covered by any tax investigation insurance.
  • If the scheme is found to be fraudulent, evasion or fails then HMRC will demand payment of underpaid taxes, interest and penalties, which can be up to 200% of tax charged where offshore elements exist.
  • If a client participates in such a scheme I would issue a disengagement letter as I have no wish to be tainted by a clients involvement.
  • Although schemes may be legal I do not believe they are ethical, if clients wish to pursue them they are welcome to seek advice from another tax adviser.
  • I have been involved in trying to defend so many schemes where the provider has taken the client’s money and then disappeared.
  • Clients are often left high and dry as the costs involved in trying to defend someone else's schemes are prohibitive to say the least.
  • It is not for me as a professional accountant to selectively moralise on my clients behalf, after all they do pay me to minimise their tax liabilities and plan their company and personal business affairs in a tax efficient and legal manner
  • The scheme promoters out there range from very professional to the downright cowboys.

What would you say?

Mark Lee is consultant practice editor of AccountingWEB and writes the BookMarkLee blog. This is for accountants who want to stand out and be more successful in practice, online and in life. He is also Chairman of the Tax Advice Network of independent tax experts. 

Replies (15)

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By AndyC555
14th May 2013 10:25

A good summary...

A good summary of the position we find ourselves in today as tax advisors.

 

The only thing I'd add is the hypocrisy of those from government & HMRC when they play the morality card.  Have any tax advisors got anywhere when trying to use that as a defence when an inadvertant error costs tax?

 

"Dear Mr TaxMan

My client MEANT to claim this and met all the requirements so can you look at this on moral grounds and overlook the missed time-limit?"

 

What response will you get from HMRC?  "The rules are the rules".

Funny how that is now expected to work only one way.

 

AndyC

 

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By HBTax
14th May 2013 10:33

Another good analysis

A very fair analysis of the changing pattern Mark. I have been around tax avoidance schemes in one form or another for many years (mainly helping clients after the event) and the few that I have seen "work" have been on technicalities i.e. HMRC not raising an enquiry in time etc. etc. Another important thing to bear in mind is that of PI. I have been having conversations with large PI brokers recently who have informed me that due to a number of firms (who probably have been suing banks over the PPI saga for the past few years, interesting how you remove one letter to form a completely new business model!) entering the market offering to sue professional accountants and tax advisers for" negligent" advice to their clients when they entered into a tax avoidance scheme and thus many insurers will not want to entertain the idea of offering insurance to such firms even where they are not the "provider" of the scheme. Something to think about.......

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By raybackler
14th May 2013 11:03

Brilliant article

Mark,

This is an excellent summary of what is a difficult subject to deal with.  I have had a client suggest that we should bring schemes to their attention as part of our job, but I disagree.  I always use a selection of the points in responding and now I have a much fuller list in your article, notably the legal aspect where it can take an awfully long time through the courts with large expense to defend a position.  I also ask for the HMRC Scheme Reference Number and amazingly there are schemes being promoted that do not have this in place.

Ray

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By boaters
14th May 2013 11:22

It is our duty to tell our clients

Tax avoidance strategies are legal..even if it is for many thousands of pounds!

Putting a private taxi receipt through the business is evasion! 

It is our duty to make our clients aware of planning opportunities providing we have acted professionally in doing our due diligence on the providers. Also we do not sell the opportunity but rather we inform and educate the client, let them understand the risks and make their own decisions. We do not advise them to do the scheme or tell them it will work. 

Of course as individuals we have to take a view and draw our own lines but i do not think the public are at all influenced by the rhetoric in the media. My experience is the public object to the ability of multi-nationals diverting profits elsewhere to an individual reducing their tax liability via legal methods.

 

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By Carl B
14th May 2013 11:44

Tax avoidance

No-one can really object to a higher rate tax payer getting back 40p from the loss of £1.  The perceived problem with many schemes is that they create a loss where one does not really exist.  Typically this requires some clever financing to inflate the costs on which relief is claimed.  If you spend your £1 and "borrow" a further £4 then you hope for £2 in tax relief on the £5 total.  HMRC understandably objects to the additional £4 finding it's way back to the investing taxpayer and, as advisers, can we really support and/or promote this kind of fiction?  If we can, then there is no moral dilemma.  If not, then Mark is right to suggest the possibility of disengagement from the client.  I personally think the days of "try it and see if we get away with it" are long gone, so we are left with some hard choices!

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By Tomazaan
14th May 2013 12:19

Tax morality

I do not understand how a department that brought the case of Pepper v Hart can claim to have the moral high ground where tax is concerned.  They should hang their heads in shame over that one.

 

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By michaelblake
14th May 2013 12:59

GAAR

I would also add that all practitioners advising clients who are contemplating the use of avoidance schemes now need to read and understand the 160 pages or so of HMRC's GAAR Guidance issued recently. See link at  

http://www.hmrc.gov.uk/avoidance/gaar.htm

I spent a very instructive two hours or so reading it on a train to London yesterday. For those who cannot find the time (and if you are advising clients on tax matters you must find the time if you are not to be in breach of your PI policy and your institutes rules to keep abreast of professional developments) the following brief extract from paragraphs B2.2 and B2.3 will be instructive:

 

No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores. The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.” 

B2.3The last quote from the judgment of Lord Clyde in the Ayrshire Pullman case epitomises the approach which Parliament has rejected in enacting the GAAR legislation. Taxation is not to be treated as a game where taxpayers can indulge in any ingenious scheme in order to eliminate or reduce their tax liability.  

 

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By John Snowden
14th May 2013 14:08

Bothered...

While not being one particularly to favour of aggressive tax planning, I find myself bothered by the political, popular, media-driven and now GAAR-related demands for an ethical overlay to the tax code as far as taxpayers are concerned, to be contrasted all too often by literal and self-serving interpretations of the code by HMRC as well as often misleading headlining of budget proposals by chancellors. I am thinking here of such things as 'tainted taper' as it existed during the Brown chancellorship and the current disallowance of any capital gains tax relief on EIS shares if it so happens that income tax relief could not be claimed with any effect; not to mention rigorous application of deadlines by HMRC. It seems to me that this imbalance is plain wrong, and entirely impractical. The only lasting solution would be a radical simplification of the tax code, which is vanishingly unlikely while it is controlled in a world of democracy and the adversarial system. To which regard, I am also very bothered by the behaviour most particularly of Margaret Hodge and by the extent to which she (and others I can think of) have drawn the attention of our gullible and lazy media.

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By VIOLA26
14th May 2013 14:58

Follow the law

The correct application tax law (as any other law) should be tested in a Court of Law and not in the Court of Public Opinion.  The integrity of our legal system depends upon that basic premise.  It is outrageous for MPs to preach morality given the expenses scandal. 

The Government can change the law if its correct application proves not to work out as it had intended; indeed the new GAAR is an attempt to stem the flow of new schemes.  It might do the trick; or it might not in which case further provisions may be needed. 

There are often injustices in law, family law is littered with disgrunted ex-spouses in what the UK family law system has been defined as a Gold-Diggers Charter.  Similarly there are injustuices  in tax law - the power of democracy is that laws can be changed. 

As a tax advisor, we are to advise on what the law is and our view on its interpretation, the risks of it being held to apply differently, potentially giving a client an adverse outcome etc..  Our moral view on tax avoidance and schemes is irrelevant; our clients are entitled to(and pay handsomely for) balanced advice based upon the law without bias.

 

 

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7om
By Tom 7000
14th May 2013 15:13

My view

Revenue and PBT are sufficiently high enough dealing with simple compliance work. Why stress yourself out.  If anyone asks about these schemes I give them the link to PWCs website. I am sure they may be able to assist..etc etc... 

 

I am neither for nor against them, I just think  its just more trouble than its worth, my engagement letter says I'll fill your return in....so thats what I do

 

I guess its because Im just a simple northern lad...

.

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By Ian McTernan CTA
15th May 2013 13:38

Clients..

With the exception of stamp duty on property transactions (I am a firm believer that the SELLER should be the one to pay it, NOT the buyer who is struggling to raise the deposit and then has to find even more money), where I will point clients in the direction of scheme providers, my clients don't use any of these schemes.  That's mainly because the majority of my clients just don't earn enough to be worthwhile for the scheme providers.

On the occasions I have forwarded people to the schemes, they generally come away feeling the scheme is more to benefit the provider with enormous fees rather than to benefit the client- the charges on a lot of the schemes are huge (I know, to cover the cost of coming up with it, blah blah- never mind the yacht and mansion).

I will always consider any schemes and make clients aware of them if they fit the criteria, as that is our duty, and then leave them to make their own choice.

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Replying to DJKL:
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By VIOLA26
15th May 2013 15:24

From the tone of your post and the mention of yacht / mansion, duty fuelled with the required dosage of "green eyed"  bias no doubt.  

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By bggoose1
06th Jun 2013 14:57

Can't imagine that this case will get much press coverage!

The sad case of an accountant who was subject to a professional negligence claim for not advising on a tax avoidance scheme. He lost!!

Mehjoo v Harben Barker (A Firm) & Anor [2013] EWHC 1500 (QB) (05 June 2013)

What are we supposed to do?  If you advise on tax avoidance you are running the risk of being looked upon as acting in a morally repugnant manner but failing to inform a client of a tax avoidance technique seems to leave you open to a negligence claim.  Damned if you do, damned if you don't!

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By John Snowden
08th Jun 2013 12:28

Press coverage

I saw this in Thursday's Times on page 3, as a matter of fact, and it was not a three-liner either. I gather Harben Barker is to appeal.

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Mark Lee 2017
By Mark Lee
09th Jun 2013 19:48

bggoose1 - Don't believe the headlines!

I have now reviewed the Mehjoo professional negligence case and conclude that summary reports thereof are misleading in the extreme. 

The reason the accountants were found to be negligent was because they failed to recognise that they didn't have sufficient in-house expertise to advise a non-dom client. What they judge actually said was they should have referred him to an expert.

I have just written an article for accountingweb that explains the situation in more detail. I hope it will be posted online in the next day or so.

Mark

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