Monday, August 3, 2009

Five facts all accountants need to know about tax avoidance schemes

This post follows on from a recent item I wrote about: Naive promoters of tax avoidance schemes.

So here are what I call the Five Facts you need to know about tax avoidance schemes:
  1. Accountants should only promote such schemes if they are confident that they understand ALL of the risks and consequences for their clients;
  2. Accountants do NOT have to advocate structured tax avoidance schemes;
  3. Accountants who promote such schemes honestly will find that typically only around one in ten clients will proceed once they understand all of the risks;
  4. Accountants do NOT have to notify all clients that such schemes exist;
  5. Accountants are NOT at risk of successful negligence claims if they fail to alert clients to such schemes.
Do I need to expand or explain the justification for any of these? I'm happy to do so and also to receive comments from people with a different view. Experience suggests however that these five facts will be quite comforting for those accountants who are on the receiving end of promotions like the one I mentioned in my previous post.


  1. In respect of your fifth fact, what about the judgement delivered in the Hurlingham case which suggests that if a client is to undertake a transaction, then appropriate tax advice should be provided by the advisor taking responsibility for tax advice? If the advisor is aware of arrangements that are relevant to the client paying less tax than would be the case but for the adoption of the arrangements is the advisor not negligent if he does not inform the client of the arrangements? In addition, if the advisor is not aware of such arrangements but there are many other advisors that are aware of such arrangements is the actual advisor not negligent in not being sufficiently informed about up to date tax planning arrangements? In the case of this second set of circumstances, I do not consider that a tax advisor at firm A is negligent if he is not aware of a tax planning arrangement devised by firm B, knowledge of which has not yet "leaked" out into the market. Whether the tax at issue is SDLT or say income tax/capital gains tax for employees, I would have thought the same principles of negligence would apply. What are your views?

  2. Thanks for the above comment. I'm delighted to be able to clarify my comments. I think there are 3 points to make:

    1 - Tax planning vs tax avoidance scheme.
    There is an enormous difference between failing to give clients conventional tax planning advice and failing to advocate and advise on a structured tax avoidance scheme. It is to the latter that I am referring. And I stand by my view.

    2 - Hurlingham Estates v Wilde & Partners (1997).

    In this case Hurlingham fell into a tax trap in the context of a conveyancing transaction. Wilde & Partners relied on an agreement that it should not be responsible for the tax aspects of the deal. The court held that, because Wilde & Partners could produce no evidence of such an agreement, it could not place reliance on it.

    Note that Hurlingham fell into a tax trap that any reasonably competent legal adviser would have helped them to avoid. Again, not the same as failing to suggest that the taxpayer undertake a structured avoidance scheme.

    3 - Standard of care in professional negligence cases.
    Whilst I am not a lawyer I have acted as an expert witness in professional negligence cases. I also research, write and lecture on the subject.

    The standard to which accountants are held is that of being "reasonably competent". In my view any reasonably competent accountant would refuse to advocate and advise on complex structured tax avoidance schemes unless they understood them and could provide full advice including the inevitable caveats and risks. It is often uneconomic to devote the time necessary to get to this level of understanding and it would be negligent to advise a client without such knowledge.

    I would gladly act as an expert to support anyone being challenged in this regard.

    As such I feel quite secure in providing the advice at point 5 above.

  3. Surely the point at issue in point 5 is not whether you will be sued, but whether you are offering a complete service to your client.

    I believe that there is a duty to inform clients of the opportunities available, provided you understand the basics of the scheme, but explain only tax barristers will fully know the whole picture.

    Just because it takes a specialist barrister to create the scheme makes it no less valuable than, say, a personal pension plan, which I am sure no accountants understand any more than complex tax schemes.

    I believe that often the best outcome is an informed client, who is aware of the opportunities and an explanation of the basics, but chooses to use their own judgement (not delegating responsibility and risk to you) for the decision as to whether to take up a scheme.

    Remember, business owners are risk takers by nature. They know accountants are the exact opposite and pay for us to explain tax matters, including the risks that they could be taking.

  4. Sorry - my fifth point is my fifth point and I stand by it - for the reasons explained in my reply to the first comment on this post.

    I accept your view re the provision of a complete service to a client. But it is only your view. Mine is different for the reasons stated.

    Sorry but I don't accept your comparison of tax schemes and personal pension plans. The tax rules as regards the latter are clear. Accountants and tax advisers need only understand the rules regarding tax relief for pension contributions. Accountants explicitly do not advise on the investment performance of pension funds (which would involve understanding how the tax rules impact the fund itself).

    I do however accept that your preferred approach is perfectly reasonable. But let me be absolutely clear, in the context of this piece, THERE IS NO DUTY on practicing accountants and tax advisers to make themselves aware of or "to inform clients of the opportunities available."

    For what it's worth perhaps I should add that for the last 2 years I have sat on the pan-professional body working party that is updating the Guide to Professional Conduct for those who work in tax. I think I know what are and what are not professional duties in this regard.