Should lawyers be exempt from disclosing their tax advice?

Accountancy Age is reporting that the taxman is set for a battle with the legal profession over lawyers’ attempts to keep tax advice confidential.

One unnamed law firm has apparently sent out a circular that says: ‘Bring your tax issues to us so we can ensure that HMRC can never get access to them’ – meaning that they think legal professional privilege does that. The taxman doesn't agree and wants to ensure that the age old concept is not used to aid tax cheats.

The concept of legal professional privilege is more complex than many people assume. However most tax advisers accept, reluctantly, that the rules apply differently to lawyers as compared with non-lawyers. And the application of the rules to lawyers seems to extend to non-lawyers who are employed by law firms. I suspect this is one of the reasons for the movement of some tax investigation specialists into law firms - the most recent example bring those who left Tenon and moved to McGrigors.

The legal and accountancy professions thus find themselves on opposite sides of the argument. Accountants want equality of treatment. But no one expects this to mean that legal professional privilege will be extended to allow taxpayers to secure privileged tax advice from accountants. Lawyers on the other hand however want to retain their exclusive rights and the Law Society has engaged a QC to argue the point for them.

The way that the rules of professional privileged apply to different professions has long been an issue. It started to become of real concern when the rules for Disclosure of Tax Avoidance Schemes were first published in 2004. As a result of challenges by the CCAB the rules were amended to ensure that 'privileged' advice still had to be disclosed albeit without breaching the rules of privilege.

Since then the issue has been bubbling away behind the scenes. I for one am pleased it is now back in the public domain. Whatever the merits of the concept of professional privilege generally surely it should not extend to tax advice which would be disclosable if provided by any other professional.

What do you think?

The Legg report ignores the tax consequences of MPs expenses

Sir Thomas Legg's report on MPs' expenses proved that abuse of the system was widespread with more than half of all MPs required to make repayments. When the scandal first became apparent through the Telegraph's reports last year I started to blog here about related tax issues.

A shameful footnote to the whole affair is that the Additional Costs Allowance is tax-free - as determined by the 1983 Finance Act (which, like all tax law, was passed by Parliament who, on this occasion, understood precisely what they were doing).

Having previously identified many tax related questions raised by this scandal I have summarised the 3 most crucial ones below. It would be good to have these addressed as part of the wholesale review of the system for reimbursing MPs' expenses.

1 - Will MPs be subject to the same tax consequences as employees and company directors who repay excess expenses?
Tax law normally determines that such payments to employees and directors should be treated as loans until they are repaid. HMRC then charges tax on the notional interest on this 'borrowed' money. In the case of MPs this would mean paying tax on such interest to cover the period from when they received the money until it is repaid. Their employer is liable to notify HMRC of the dates and sums involved.

2 - Why are MPs exempt from having to supply receipts for expenditure under £25?
Until 2008 the exemption for MPs related to expenses upto £250 and this system has been widely criticised. The Telegraph reported that MPs will have to produce receipts for all claims of more than £25 as part of a major overhaul of their much-criticised system for claiming expenses. However all other directors, employees and those running their own businesses have to keep receipts in repsect of all business related expenditure.

What is the justification of continuing a more lax system for MPs? Either the normal rule should apply to all taxpayers or else MPs should be subject to the same record keeping obligations as everyone else.

3 - Are MPs really exempt from tax in respect of all their 'expenses'?
The tax exemption introduced by Finance Act 1983 is now contained in Section 292 ITEPA. However this only refers to Overnight expenses allowances as defined in para 2.1 of The Green Book and covers "personal additional accommodation expenditure (PAAE)" which is 'available to reimburse Members of the additional expenses necessarily incurred in staying away from their main home for the purpose of performing their parliamentary duties'.

The Additional Costs Allowance (ACA) to which Sir Thomas Legg's report refers is a phrase that has not been used in the Green Book since 2006 but seems to be considered synonymous with the Living Away from Home Allowance, Overnight Allowance, PAAE and the Accommodation Allowance.

However the Green Book goes on to describe other allowances that bear no relation to 'overnight expenses'. Given the abuse of the 'ACA' shouldn't there also be a review of the extent to which MPs have received reimbursement of other expenses - especially as no tax exemption applies in such cases.

Answers on a postcard please.....

IR35 avoidance scheme - Dispute between the promoters

Full details of an old IR35 tax avoidance scheme are explained in the judgment from September 2009 of Montpelier v Jones and Morris.

The case centered on a dispute between various parties who had arguably either conceived, funded or promoted the scheme. The judgment includes:

• a summary of the background to the scheme which followed the introduction of 'IR35' in 1999;
• an explanation as to the development and promotion of the scheme from 2000-2003;
• names of all the companies involved including Montpelier Tax Planning (Isle of Man) Limited, Westwood, OMPS Limited, Contractor Solutions Limited ("CSL"), Executive Solutions Limited ("ESL"), MTM Consultants Limited, MTM (Isle of Man) Limited ('MTM') and www.suomotu.com.
  
• reference to Counsel's opinions (including those of David Milne QC, Philip Baker, Adrian Shipwright and Robert Argles) and extracts from some settled notes of conferences with Counsel;
• reference to E&Y London instructing E&Y IoM to withdraw from participation in the scheme, which was allegedly described as a "political hot potato";
• reference to alternative structures involving the use of Employee Benefit Trusts (EBTs);
• Montpelier's claims of breach of confidence, breach of copyright, passing off and procuring breaches of contract;
• The counterclaim by Mr Jones and Mr Morris that Montpelier repudiated contractual arrangements.

Although this was not a tax case the level of detail contained in the judgment will be of interest to anyone who advises on tax avoidance schemes. And also to those who shy away from them.

As I've indicated in previous posts here, the existence of Counsel's opinion does not guarantee that a scheme will succeed. The ultimate decision in this regard will rarely be known with certainty until after it has been tested in the courts. And that often means a long wait.

Is it ever morally acceptable to fiddle your tax form? (Radio4)

A friend suggested I listen to a Radio 4 Sunday morning religious programme broadcast this morning. The headline item was titled: Is it ever morally acceptable to fiddle your tax form?

I listened with interest and growing disappointment as I realised that this was a clear case of misrepresentation.

In the event the real focus was the age old argument about the moral rationale for telling white lies. As one speaker noted: When your wife asks: "Does this dress make me look fat?" No man should ever reply, "No dear, it's your fat that makes you look fat".

But en route to that discussion the presenter, Ed Stourton, introduced the programme by referencing "good citizens" who had either already filed their tax returns or were "scrambling to meet tonight's deadline". The BBC had apparently undertaken a straw poll on the streets of Manchester and the public had presumably been asked the question from the title of the programme.

Interestingly the majority of those asked seemed NOT to have fiddled their taxes. I got the impression that this wasn't what the producers had expected. There were a couple of more interesting replies such as:

"Some people tweak their receipts - fair play to them"

"I've embellished, but never fiddled (I've claimed I've done more miles in the car)"

But then it was clear that subsequent replies were to more generic questions about white lies and 'ethical creep'.

Back in the studio the distinction between embellishing your expense claims and fiddling your tax return was later described, without approval, as "cunning" - with no reference being made to the 'cunning' MPs' expenses scandal last year (which prompted me to list the 25 unanswered tax questions).

There was also a reference to the classical distinction between legal tax avoidance and illegal tax evasion.

But perhaps the most shocking (to me) point was when Ed Stourton asked his guests:

"Is anyone who uses an accountant guilty of an ethical crime?"

The implication seemed to be that all accountants help their clients pay less tax than is strictly due. His guests did not agree with this implicit slur on our profession and the discussion then moved entirely away from the subject of tax forms - despite the title of the programme. I wonder why?

At the time of writing you can listen to the programme online or as a Radio 4 podcast.

Retrospective tax avoidance legislation ruled LEGAL

Another nail has been placed in the coffin of 'artificial' tax avoidance schemes.

The media is today reporting the outcome of a claim for judicial review brought by Robert Huitson - who is described as a UK resident self-employed IT contractor. By arranging his affairs to conform with an avoidance scheme being marketed by Montpelier Tax Consultants in the Isle of Man (IoM), Mr Huitson paid the equivalent of just 3.5% tax on his income. He had secured this 'tax advantage' since first becoming a client of Montpelier in June 2001.

The scheme in question exploited the terms of the UK-IoM Double Tax Agreement (DTA) and was well known to HMRC.

As part of his March 2008 Budget, the Chancellor published BN66 - Double Taxation Treaty Abuse. This announced the introduction of retrospective anti-avoidance amendments to legislation introduced in 1987. The new rules were enacted as section 58 Finance Act 2008 despite some protests by opposition parties at the retrospective nature of the law.

The Government stated that UK users of a scheme that exploited a loophole in the 1987 legislation “remain liable to UK tax”, and have done since 1987, “despite the elaborate, artificial structure designed to exempt them.” Obviously those who had been promoting tax avoidance schemes that exploited the loophole were unhappy. As were many of those who had bought into such schemes - arguably in good faith that those promoting the schemes seemed genuinely confident that the schemes were both legal and effective.

In considering the facts of the case reported today, Mr Justice Kenneth Parker noted that:

"Whatever the true meaning of the DTA, there was a wider rationale in terms of public policy: UK residents should pay UK income tax on the profits of any trade or profession; and a DTA, intended to relieve from double taxation, should not be used as an instrument either to avoid all taxation or to reduce it to well below the level that would be applicable to the relevant income in the country of residence."

This strikes me as suggesting a purposive interpretation of the law.

He also stated, in defending HMRC's approach:

"...in my view, the state was not obliged to test the matter first in the courts before enacting legislation, even with retrospective effect. The public policy was of such paramount importance that legislation was necessary in any event to put the position beyond all doubt and to maintain the relevant public policy"

"At no time did HMRC indicate to affected taxpayers, including the Claimant, that they could safely rely upon the arrangements. On the contrary, HMRC consistently maintained that the arrangements did not work, and advised taxpayers to pay on account the income tax which HMRC said was properly due. Any prudent taxpayer who followed that advice would not now be prejudiced by the retrospective effect of the legislation."

As I have indicated many, many times on this blog, there is often a long time lag between someone entering into a tax avoidance scheme and when they can be certain as to the outcome. In this case HMRC first wrote to Mr Huitson 18 months after he started to use Montpelier's scheme. And it's only now, a further 7 years later that the outcome is clear. The High Court has ruled that the backdating of demands by HMRC was 'in the relevant circumstances proportionate' and did not breach human rights.

I have no doubt that the promoters of tax avoidance schemes will continue to assert that there is only a very small chance of any future anti-avoidance legislation being retrospective. They may be right as the facts here were specific to Double Tax Agreements. However I am equally sure that the goal posts have moved further together such that the scope for successful avoidance schemes is now smaller than ever.

Previous relevant blog posts:

• HMRC confuse tax avoidance and tax evasion again
• Were you wasting time advocating this tax scheme?
• The beginning of the end for structured tax avoidance schemes?
• Bending vs breaking tax rules
• Tax avoidance is a card game - the metaphors multiply
• Tax avoidance - what are you allowed to do? A simple guide.
• Tax avoidance schemes - a simple guide
• Naive promoters of tax avoidance schemes
• Five facts all accountants need to know about tax avoidance schemes
• Five more facts all accountants need to understand about tax avoidance schemes