Wednesday, March 11, 2009

Is it better not to know?

Do you know too much? And what do you do if your answer is 'yes'?

Assume you have a client who has a tax problem and a friend of theirs suggests what seems to be a common sense solution. The client explains the situation and tells you of the proposed solution. Indeed it's not unknown for the 'friend' to be a commercial 'audit' partner.

If your tax knowledge is limited you may simply go ahead with the proposal wholly unaware of the adverse tax consequences. On the other hand, if you have sufficient understanding of relevant tax issues you may have to discourage your client from pursuing the friend's idea. That may be fine if you are able to identify an alternative course of action that achieves the same result. But if you can't?

Most professionally qualified accountants and tax advisers are obliged to comply with the IFAC code of ethics. This includes obligations to evidence integrity, objectivity and professional behaviour. The main accounting and tax bodies have gone further in their jointly published Guide to Professional Conduct for those working in tax. This includes the following:
“Members will from time to time find themselves having to advise on matters which require specialist knowledge. In such circumstances they should be careful not to go beyond their own level of competence and, if necessary, should seek help from a specialist in the field”.
So if you KNOW that your knowledge is deficient, you are professionally obliged to involve a specialist.

But if you DON'T know that when you give advice then in all liklihood the client's tax return will be incorrect. HMRC may notice this before the enquiry window closes and start an enquiry. Alternatively they may not pick up the error until a later date and seek to make a discovery - which will be hard to resist as it's unlikely that sufficient disclosure was made on the relevant return. Or HMRC may never become aware of the transations in question.

If HMRC do either open an enquiry or make a 'discovery' then additional tax will become payable together with interest and probably penalties.

But if you did know the law you would be obliged to advise the client of the tax to be paid. And there would be no question of (unintentionally) waiting for HMRC to spot the mistake.

The same scenario arises when a well meaning adviser provides constructive but naive advice. In reality it may not achieve the hoped for tax reduction, or worse it may create an increased tax liability. But in the meantime the client is happy, thinks the adviser is wonderful and tells all their friends. The adviser is also happy as they have generated additional fees (in good faith).
And the client may get lucky, if HMRC never become aware of the issues.

However if an adviser has a fuller understanding of the tax law they may quickly conclude that there is nothing the client can do to reduce the tax due on the transaction. So the client thinks the adviser is unhelpful, the adviser has lower fees and the client pays more tax. Everyone is worse off.

Hence my opening question - Sometimes, is it better NOT to know?

1 comment:

  1. You raise a good point, we can't all be experts in everything.

    I hope that in my own dealings with clients I know when to introduce an expert in a particular area.

    My motivation is customer service first, profit second. If my customers feel like they have recieved excellent support, I believ they are more likely to 1, keep using me, and 2, refer me on to their own contacts.

    I have often thought that this approach is unique to those who are involved in the finacial side of running businesses - which other discipline is judged by the ongoing financial success of their clients?