Friday, November 14, 2008

Beware of tax schemes you don't understand

A firm of accountants recently lost a court battle with their PI insurers to cover negligence claims arising from failed tax avoidance schemes. What can we learn from this?

Thinking back, this isn't a scenario I have previously mentioned during my talks on how to protect your firm and avoid professional negligence claims. I've addressed many related points though, including the risks that advisers run when they promote tax schemes that they don't understand.

The recent case involved partners at Kidsons (now part of Baker Tilly) who sold tax schemes that the Inland Revenue subsequently ruled inadmissible. This led, as it does so often, to claims from clients that they had not been adequately informed of the risks.

Kidsons expected such claims to be covered by their PI policy but the insurers refused to pay out claiming that they had not been notified of the claims in good time. This is another point that I stress during my talks. The need to satisfy what is a key term in all PI policies - to notify all circumstances that could led to a claim - not simply to notify claims as they arise.

The tax schemes in question were marketed by a company called Solutions at Fiscal Innovation Limited which was owned and managed by Kidsons. I would assume that the schemes in question had the benefit of Counsel's opinion as to their legality and the expected tax outcome. Such schemes invariably do. But these Opinions are not guarantees and, as this case shows, woe betide anyone who underplays the risks when promoting such schemes to clients.

And, as I also regularly point out - the time lags in such cases can be significant. From what I can tell it seems likely that the schemes in question were being promoted in the late 1990s. It was seven years ago in October 2001 that the insurers were first notified that there could be problems. It it evident that the 'fiscal engineering' was unsuccessful and I would assume that the tax outcome was resolved in 2003 or 2004 (probably arounhd 5 years after the planning took place). The dispute between the accountants and their insurers rumbled on with a High Court case in August 2007 and now the Court of Appeal decision in October 2008.

The three key points that I would highlight here are:
  • The dangers of advising clients about the expected outcome of tax avoidance schemes when you do not have the technical expertise to fully appreciate the risks and key issues;
  • The importance of ensuring that clients appreciate the risks such that they cannot claim to have been a victim of 'mis-selling';
  • The liklihood of 'schemes' being challenged by HMRC and of such challenges dragging on and on.
  • The importance of notifying your PI insurers whenever you become aware of circumstances that could lead to a negligence claim.

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