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The Tax ‘Amnesty’, SOCA and Privilege. By David Winch

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13th Jun 2007
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Confused about reporting obligations to SOCA under the terms of the tax "amnesty"? David Winch has taken time out to clarify them for you.

As the deadline for initial notifications to HMRC under the tax ‘amnesty’ draws near, accountants have been grappling with their responsibilities in relation to suspicious activity reports (SARs) regarding clients’ confessions of past tax evasion.

The initial guidance from the professional bodies, published on 20 April, indicated that “Members should note that there is no relaxation of the requirement to make a Serious Organised Crime Agency (SOCA) report in cases involving evasion. HMRC have suggested, however, that when making a SOCA report members should refer to the fact that a notification will be made to HMRC under this initiative”.

Understandably many accountants took this to mean that where a client volunteers information under the ‘amnesty’ the accountant is required to make a report to SOCA.
However on 4 June the professional bodies issued further guidance in relation to information received in ‘privileged’ circumstances. In these circumstances “individuals who may be guilty of tax evasion [can] approach their chartered accountant or tax adviser for [legal] advice, for example on where they stand under the law or what they should do, in the knowledge that the information will not be passed to SOCA by way of a money laundering SAR”.

Are you confused? You are not alone!

In recent years the highest courts in the land have spent many days mulling over what does and does not constitute ‘legal advice’ and what is or is not ‘privileged’ and what is meant by ‘the client’. What follows is a layman’s cheap and cheerful thumbnail sketch, not a definitive answer!

Information which is ‘privileged’ must NOT be reported to SOCA under the money laundering legislation.

Information supplied to a person by a client (or potential client, or someone acting on behalf of one) is privileged if it is supplied to that person in good faith in connection with the client’s request for legal advice or the person’s giving legal advice to the client (or in connection with litigation) if that person is a lawyer or 'relevant professional adviser' (or an employee of one).

The ‘privilege’ belongs to the client and attaches to the information supplied by him or on his behalf.

Legal advice is telling the client what the law is and, in the context of that legal advice, telling him what he ought to do and assisting him to do it.

Tax law is law, so advice about tax law can be legal advice.

The meaning of “relevant professional adviser” is spelled out in the Proceeds of Crime Act 2002 and Money Laundering Regulations 2003 (Amendment) Order 2006. A chartered or certified accountant in practice is a “relevant professional adviser”.

So suppose a client, about whom you have no reason to have a suspicion, comes to you and admits that he has income which he has concealed from you and which he believes may be taxable. He asks you whether this can be dealt with under the ‘amnesty’. What is the position as far as reporting under the money laundering legislation?
The client has clearly made a request for legal advice. If you are a ‘relevant professional adviser’ or an employee of one the information supplied by the client to enable you to answer his question is privileged. If, in the context of the your legal advice, the client supplies further information to enable you to complete a tax return or ‘amnesty’ disclosure, the privilege extends to cover that information also. So no report to SOCA should be made by you in these circumstances (unless the client provided the information with the intention of furthering a criminal purpose – but that is most unlikely in these circumstances).

But if the accountant does not have to report clear evidence of likely tax evasion in this case, when does he have to report?

An alternative example may help to clarify the position. Suppose a plumber asks you to do his accounts and tax return. He is not asking for legal advice, nor are you providing legal advice. He is asking for assistance in calculating his taxable profit in accordance with established legal principles and that is what you are doing for him. I accept that, in the course of that, legal issues might arise – for example, “Are First Year Allowances available on the vehicle he uses?” or even, “Is he employed or self-employed?”. But these legal points are subsidiary to the thrust of his request that you prepare his accounts and tax return. So you are not providing legal advice, you are performing accountancy and tax services. It follows that the information provided by the client here is not privileged. These accountancy and tax services are not being provided in the context of the provision of legal advice.

If you form a suspicion that the plumber is engaged in tax evasion you must submit an SAR to SOCA.

So the vast bulk of information received by an accountant in general practice is not privileged and is reportable to SOCA where a suspicion arises. Information received from a client seeking advice about the tax 'amnesty' might well be privileged - but that is in contrast to the situation in routine work.

Although it is unlikely to occur in practice, don’t overlook the crime/fraud exception under section 330(11) PoCA 2002. As you might expect if a client (or potential client) came to you saying, "I have had a letter from my bank about my undisclosed offshore account - where can I invest the money now that HMRC won't get to know about it?" then this would be reportable to SOCA as the client is seeking advice to further a criminal purpose.

Finally, whether or not you decide a report to SOCA is required, do keep a written note of the reasoning behind your decision. If you are still unsure seek specialist advice.

David Winch
MLRO Support Ltd
www.MLROsupport.co.uk

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Replies (15)

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By john.gilbob.freeserve.co.
14th Jun 2007 17:19

SOCA report required?
So if a client approaches you and says they have received a letter from their bank and as a result he/she wants to come clean and asks you to assist them in making a full disclosure then presumably a SOCA report is required because you are not being asked to give legal advice?

The client is already aware of the disclosure facility (because the bank have told him about it) and already knows that his/her offshore income needs to be disclosed to HMRC before contacting the accountant.

Could you just confirm my understanding is correct please David?

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David Winch
By David Winch
13th Jun 2007 20:08

Response to Gerry

Gerry

The accountant is indeed "being put on notice that criminal property has been in existence" as you put it (if he suspects that the client deliberately and dishonestly failed to declare the income).

But the key is this - "Has the information been supplied to the accountant in the context of a request for, or the provision of, legal advice?". If the answer is "Yes", then (if the other conditions are met) the information is privileged and NO report should be made to SOCA (contrary to the view you have expressed below).

(The other conditions being: (i) is the accountant a "relevant professional adviser" or an employee of one, and (ii) is the information being provided with the intention of furthering a criminal purpose. If the answers are (i) Yes and (ii) No, then these conditions are met.)

There are specific provisions within section 330* Proceeds of Crime Act 2002 and Regulation 7* Money Laundering Regulations 2003 which exempt privileged information received by lawyers and 'relevant professional advisers' and their employees from the reporting requirements. It follows that client confidentiality requires that you do not divulge such information to SOCA.

If the initial information is privileged, then the further information provided to deal with the "nuts and bolts" as you put it is also privileged (so there is still no report to SOCA). That is because although, as you rightly suggest, matters have moved beyond simply giving legal advice, we are still working in the context of the initial legal advice telling the client what he ought to do and assisting him to do it - so privilege still operates.

If the client does not act upon the accountant's advice, then the information remains privileged unless you form the opinion that the information was, after all, supplied to you with the intention of furthering a criminal purpose. I think you are unlikely to form that opinion. (So probably still no report to SOCA.)

There is of course a real problem in continuing to act for a client whom you now believe has not been truthful with you in the past and has done nothing to put matters right. But that does not involve a report to SOCA (although it will almost certainly involve you declining to act for him in future).

Re-read the article in the light of this and see if the position is now clear.

David
www.MLROsupport.co.uk

*as amended by the Serious Organised Crime and Police Act 2005 and the Proceeds of Crime Act 2002 and Money Laundering Regulations 2003 (Amendment) Order 2006

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David Winch
By David Winch
14th Jun 2007 18:52

Response to John

John

Strictly speaking, if all the client wants you to do is to help him to fill in the forms - so you are providing a computational service rather than advice upon the law and its implications - and you confine yourself just to that then, John, you are correct, a report to SOCA will be required.

However in the vast majority of cases in relation to the 'amnesty' the client will be requesting advice on his tax responsibilities (e.g. "Is UK tax chargeable on this interest?" or "How many years back can the taxman go?" or "Do I have to explain the source of the capital I put into the account?" or "Could I be prosecuted for this?" or "What about anything else not on my tax return?"), or the accountant will provide advice on these or other legal issues which go to the heart of the work being undertaken for the client (even if not expressly asked to do so), and in that case no report to SOCA should be made.

I think one could argue that any client coming to an accountant for assistance with the amnesty is, by implication at least, seeking legal advice and not simply assistance with computations and form filling. Wouldn't the accountant be considered negligent if he did not explain to the client his legal position and, for example, the legal implications of an incomplete disclosure? And if the accountant does the sensible thing and gives some legal advice then there should be no report to SOCA.

Perhaps I should also point out that the rules on information received in 'privileged' circumstances do not only apply in the case of the 'amnesty' - they apply generally where a client is seeking, or the accountant is providing, legal advice (or where a client has provided the information in connection with actual or contemplated legal proceedings, for example a divorce) and when accountancy and tax services are being provided in the context of legal advice (or legal proceedings). The article above focuses on the 'amnesty' simply because of the imminent notification deadline.

David

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By AnonymousUser
25th Jun 2007 16:42

David
Do you have access to the June 2007 issue of TAXline, the monthly publication of the ICAEW tax faculty? If so, I expect you have had a look at page 12. Although it is perhaps not absolutely prescriptive it does seem to be very heavily slanted in favour of a SAR to SOCA if you suspect that the client will not act on advice that you have given and that you initially regarded as covered by PRE (God, don't you love acronyms?).

It is possible that the distinction hinges on at what point in proceedings a criminal intent matures. Reading your posts I get the impression that you take the view that PRE persists provided that the client's criminal aspirations developed subsequent to his approaching you for (and receiving) advice. The ICAEW article does not (in my reading) consider that distinction:

"However, POCA PRE may be set aside if the crime/fraud exception applies. For example, if the client behaves in a way that makes the adviser suspicious that he intends to use the advice to further or better conceal his evasion, then a money laundering SAR could be required."

If you suspect that, having provided the advice, the client may not act on it, I find it hard to construct a justification for the facts falling outside of this guidance.

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David Winch
By David Winch
26th Jun 2007 10:11

Continuing to act for a client

Clint

Just to be clear, if you have an existing or continuing client who discusses with you the possibility of making a disclosure under the 'amnesty' and then makes no disclosure, then you have a serious ethical problem.

The issue there I would say is not one of reporting to SOCA, because as far as reporting to SOCA is concerned the situation is as set out in my post immediately below (and the information will normally be privileged).

Rather the issue is whether you can continue to act for a client in the knowledge (presumably) that he has in the past not been truthful with you and / or not been truthful in his dealings with HMR&C. The problem is particularly acute if you now know or suspect that returns which your firm have submitted in the past for that client were incorrect and fraudulent.

I cannot see that you can continue to act for that client in such circumstances. And if the client instructs a new accountant I would expect you to refer to the problem in your professional clearance letter (there is no question of 'tipping-off' where no report has been, or will be, made to SOCA).

But the article is intended to address issues concerning reports to SOCA - not issues of professional ethics.

David

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David Winch
By David Winch
26th Jun 2007 09:16

Response to Clint

Clint

Thanks for raising this point.

I have seen this TAXLINE article (the same information was posted on the ICAEW website on 4 June, I think, and I have referred to it in the article above).

The crime / fraud exception (to the exemption which would otherwise operate) applies to information "which is communicated or given with the intention of furthering a criminal purpose" (i.e. information provided to the accountant or lawyer, not by him - on the presumption that the adviser has no intention of furthering a criminal purpose) - section 330(11) PoCA 2002.

The ICAEW guidance refers, by way of example, to a situation in which "the client BEHAVES in a way that makes the adviser suspicious that HE INTENDS TO USE THE ADVICE to further or better conceal his evasion". (Emphasis added)

I would agree with that.

However, whilst I would agree that failing to do something does amount to a behaviour, I do not think that a situation in which one simply hears nothing further from a potential client (who had turned up for a meeting to discuss the tax 'amnesty') is a situation in which one would ordinarily become suspicious that the client had intended to use the advice or information given to him to further or better conceal his evasion.

In such a situation I would ordinarily conclude that the client had decided to either, (i) seek advice from someone else, or (ii) do nothing at all and bury his head in the sand. Whatever my view of the client's wisdom, I would not think that his non-reappearance would ordinarily trigger a report to SOCA on the basis that privilege had now been lost.

Of course, if his questions to me at the initial interview cause me to be suspicious of his motives (particularly in the light of his subsequent non-reappearance), for example if he asked, "Which country's banks don't provide information to the UK tax authorities?", then things would be different!

That is my reading both of PoCA and of the ICAEW advice. I don't perceive any ICAEW 'slant' towards reporting a potential client to SOCA simply because he fails to re-appear and is likely to make no use whatsoever of the accountant's good advice.

David
www.MLROsupport.co.uk

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By AnonymousUser
15th Jun 2007 17:02

artificial looking distinction
Is this another illustration of

“There are few greater stimuli to human ingenuity than the prospect of avoiding fiscal liability.” ( lord Diplock) ?

I suspect that this artificial looking distinction has been contrived because some prominent people were likely to be embarrassed by the requirement of accountants to report to SOCA.

I have doubts about the distinction drawn up.

Few people obtain tax advice except for the purpose of coming to agreement with the tax authorities which is a pre existing legal obligation. Just because the case of a banker, lawyer or film star putting millions abroad ‘safe’ from the claws of the taxman may be little more complicated ( or so we like to believe so) than a plumber hiding his stash in his cistern I see no difference in the principle.

In both cases they have to come to agreement with the authorities and that is why they require accountants. They would normally have little need for tax advice unless they were intent on putting in a return with the tax authorities.

Is this not just one law for the rich and privileged and onerous obligations for the rest?

Why can the plumber’s accountant not bill him only for ‘advice’ and thereby bypass the onerous money laundering requirements?

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David Winch
By David Winch
15th Jun 2007 17:47

Response to JP

JP

I think you need to see this in its historical context. For many many years there has been a rule of "legal professional privilege". The basic idea is that a person should be able to seek legal advice from a professional adviser (i.e. a lawyer) without fear that the lawyer will then 'shop' him to the authorities.

It is perhaps related to the rule against self-incrimination.

Those rules have withstood the challenge of PoCA 2002 (despite an initial court ruling which went the opposite way, in a case known as P v P, but was effectively over-ruled by the later case of Bowman v Fels). So it remained the case that one could tell all to one's lawyer, in the context of obtaining legal advice, without the lawyer having to report to SOCA.

However the European Directive which formed the basis of the UK anti-money laundering legislation gave the same treatment to lawyers and accountants. When the Directive was enacted in UK legislation in 2002 and 2003 the accountants for some reason got left out.

After much complaining by the CCAB bodies the UK legislation was brought into line with the EU Directive in 2006 by amendment to PoCA 2002 and MLR 2003.

So I don't think we should see some ulterior motive here.

If the plumber who hides cash in his cistern comes to his accountant to tell him about it then he gets the benefit of the exemption just like the fat cat with his millions offshore who tells his accountant about it.

However there is a difference between (i) the situation in which your client tells you something you neither knew nor suspected and seeks advice on what to do (likely to be exempt from reporting) and (ii) the situation in which your own suspicions are aroused by your examination of accounting records and information submitted to you by your client (likely to be reportable to SOCA).

As for it being a somewhat artificial distinction - yes any distinction is likely to be artificial at the margins or, to put it another way, "the law is an [***]"!

David
www.MLROsupport.co.uk

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David Winch
By David Winch
15th Jun 2007 18:04

What is "legal advice"

It may help you to determine whether you are giving your client "legal advice" or simply providing accountancy / tax services if you consider an example from the world of a solicitor in general practice.

If you have a dispute with a noisy neighbour and go to your solicitor you will be asking for legal advice about what you can do to get him to quieten down. You are seeking advice about what the relevant law is that you can use against the neighbour and the noise and how you can go about using it. If in the course of your discussion with your solicitor you mention that the noise late at night is caused by parties at which the neighbour's friends take drugs sold to them by your neighbour then that information will not be reported to SOCA by the solicitor. The information is privileged information because it is received in the context of giving legal advice.

Consider a different situation. You are selling your house and instruct your solicitor to deal with the conveyancing. Here you are not seeking legal advice, you are seeking a transactional service. In the course of discussing the sale with your solicitor you tell him that you are moving because of the noisy neighbour who is selling drugs to his friends at late night parties. This information is not privileged (because it is not received in the context of giving legal advice) and the solicitor must report it to SOCA.

Does that help?

David
www.MLROsupport.co.uk

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David Winch
By David Winch
21st Jun 2007 10:06

Response to Gerry (part 2)
CONTINUED FROM PART 1 (below)

On the other hand if that advice about presentation was not 'legal advice' then the information provided by the B of E to Freshfields in the course of obtaining that presentational advice ought to be disclosed to Three Rivers. That was the prize that Three Rivers were seeking. Three Rivers were hoping that that information would assist them in showing, not only that the B of E had been negligent, but that it had acted in 'bad faith' in connection with its supervision of BCCI.

The High Court had concluded that this advice about presentation was legal advice. The Court of Appeal had held the opposite. So the matter had come to the House of Lords, as the supreme court, for a final decision.

The House of Lords held that the advice to the Bank of England about how best to present its evidence to the Bingham Inquiry, in the context of the lawyers' advice about the law itself, fell within the scope of 'legal advice' and so was privileged and could not be disclosed to Three Rivers.

It followed that the documents and information passed to Freshfields for the purpose of obtaining that presentational advice also could not be disclosed to Three Rivers.

The House of Lords said
". . . legal advice is not confined to telling the client the law; it must include advice as to what should prudently and sensibly be done in the relevant legal context".

The final words "in the relevant legal context" are of key importance. The presentational advice was given in the context of legal advice. If that presentational advice had not been given in a relevant legal context, then the presentational advice would not have fallen within the scope of 'legal advice'.

Coming back to your question. In my view the second interview is about how best to present the information to HMR&C. That advice (most importantly) is being given in the context of the advice given in the first interview regarding the law and the client's rights, obligations or duties under the law. So that advice also, in my view, falls within the scope of 'legal advice'.

So I am firmly of the opinion that information received in the second interview is also received in 'privileged circumstances' and should not be reported to SOCA.

I see you regard the 'chain' as being broken at the end of the first interview. I do not agree and I would point to the House of Lords decision as supporting my view.

CONTINUED IN PART 3 (above)

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David Winch
By David Winch
21st Jun 2007 10:36

Response to Gerry (part 3)
CONTINUED FROM PART 2 (below)

You say:
"Your line of reasoning could lead to the ludicrous situation in which any client who has tax issues could commence an interview by asking for advice on tax law as he his returns are wrong, receive the practitioner's explanation of the law and a week later instruct the practitioner to make a voluntary disclosure on his behalf and prepare a report rectifying his position. I find it difficult to accept that such circumstances justify not reporting the matter to SOCA."

I regard that situation as entirely sensible - not ludicrous. In my view no report should be made to SOCA where (in the absence of any previous knowledge or suspicion on your part) a client volunteers information that his past returns have not been truthful and seeks your advice.

On the other hand it would be ludicrous, I suggest, not to report the matter to SOCA after the first interview (because the information is privileged) but then - when the client has decided to make a disclosure to HMR&C - to report him to SOCA! (Especially when compared to the situation with another client who does not return to make a disclosure and whom you would not report to SOCA.)

In any event, would not your report to SOCA necessarily include reference to the information received at the first interview - which you accept is privileged information? How could that be correct (except where the crime / fraud exception comes into play, which it clearly does not here)?

Remember the 4 June 2007 advice from ICAEW which I quoted in the original article:
“individuals who may be guilty of tax evasion [can] approach their chartered accountant or tax adviser for [legal] advice, for example on where they stand under the law or what they should do, in the knowledge that the information will not be passed to SOCA by way of a money laundering SAR”.

That would not be the case, would it, if your view prevailed?

Apologies for responding at such length! It is a very technical and difficult topic.

I hope it is understood from what I have said here that ordinarily advice relating to the preparation of accounts and tax returns is not 'legal advice' because it is accountancy, tax and presentational advice which is not provided in a relevant legal context. It follows that ordinarily information received from clients is not information received in 'privileged circumstances' because it is not received in connection with the seeking or providing of 'legal advice'.

David
www.MLROsupport.co.uk

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David Winch
By David Winch
21st Jun 2007 09:15

Response to Gerry (part 1)

Hi Gerry,

Good point - you are in danger of turning into a nerd / anorak like me!

Firstly let me say that if a client has previously signed a false certificate of disclosure he is likely to have his disclosure under the 'amnesty' rejected. He will then be liable to a higher penalty and may be considered for prosecution. But that is not the main point of your posting.

Your point is, I think: (1) the first interview is legal advice so OK, no report to SOCA is required, but (2) the second interview is about form filling and making a disclosure - that's not legal advice (in your view) that's routine tax work and so (you assert) a report to SOCA must now be made.

I understand your view. At one time I would have said the same thing myself. But I would have been wrong.

As I mentioned in the main article, the highest courts in the land have spent many days mulling over what is, and is not, 'legal advice'. The leading case is Three Rivers District Council v Bank of England [2004] UKHL 48.

That case resulted from the BCCI debacle. Three Rivers DC had deposited a lot of money with BCCI and had lost it when BCCI went phut! They blamed the Bank of England who were the regulators / supervisors of BCCI. Three Rivers wanted to claim compensation from the B of E.

There had previously been an inquiry into the BCCI affair, conducted by Lord Bingham. The B of E had given evidence to that inquiry.

In that connection the B of E had sought and received advice from their solicitors, Freshfields. In doing so the B of E had no doubt supplied Freshfields with a lot of information about what the B of E had, and had not, known at various times and about what actions it had, and had not, taken and why. Three Rivers wanted to see some of the correspondence and documents passed between the B of E and Freshfields. They sought a Court Order for disclosure. The B of E claimed that this correspondence / these documents were privileged and should not be disclosed to Three Rivers.

There was no contest about correspondence in which Freshfields advised the B of E about what the law was. That was 'legal advice' and was privileged and could not be disclosed to Three Rivers. So was correspondence from the B of E to Freshfields giving them the information required by Freshfields to enable them to give the B of E that advice about the relevant legal provisions.

But the House of Lords had to decide whether advice given by the lawyers to the Bank of England about how best to present its evidence to the Bingham Inquiry was 'legal advice' and therefore privileged. If it was 'legal advice' it could not be disclosed to Three Rivers, and if it was 'legal advice' then the information supplied by the B of E to Freshfields in order to obtain that presentational advice was also privileged.

CONTINUED IN PART 2 (above)

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By AnonymousUser
20th Jun 2007 16:45

Question arose in our office ...
A client asks for legal advice which you consider to fall within the definition of legal privilege (assume this is not in question). So far, so no SOCA.

Client says thank you very much, and goodbye.

You have reason to suspect that the advice was not well received and your advice (ie to disclose) may not be pursued.

Are you now placed in a different position (that of "aiding and abetting") if you do not now report your suspicion to SOCA?

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David Winch
By David Winch
20th Jun 2007 17:12

Response to Clint

Clint

See my response to Gerry on 13 June (below) :-

"If the client does not act upon the accountant's advice, then the information remains privileged unless you form the opinion that the information was, after all, supplied to you with the intention of furthering a criminal purpose. I think you are unlikely to form that opinion."

If, with the benfit of hindsight, you now form the view that when the client came to you he did so with the intention of furthering a criminal purpose, then the crime / fraud exception to the exemption kicks in, section 330(11), and the privilege is stripped away so the information becomes reportable.

But it is difficult to see in practice that consulting an accountant about a possible disclosure is likely to be intended to further a criminal purpose unless the client's real motive was to pick your brains about what HMR&C might know and what they might do so that he can take counter-measures.

By giving him the initial advice I don't believe you are becoming concerned in an arrangement which facilitates money laundering by the client (section 328). I accept that, for an accountant, 'privilege' does not operate as a defence under section 328 (although it does for a lawyer).

Probably this is as clear as mud!

In a nutshell, don't report privileged information to SOCA just because the client does not go through with a disclosure to HMR&C.

David
www.MLROsupport.co.uk

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By AnonymousUser
19th Jun 2007 15:04

Thank you David
Thank you for illuminating this subject so well

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