Stopping the duff accountants and 'tax agents' spoiling it for the rest

HMRC published a new consultation document last week - the latest in a series under the heading 'Modernising Powers, Deterrents and Safeguards'

The document is titled 'Working with Tax Agents' and it explores how HMRC interacts with 'tax agents' - a phrase said to include "accountants, solicitors, payroll bureaux, specialist advisers and VAT specialists." The main target of any changes that follow are intended to focus on the small number within the tax agent community whose work falls below a professional standard.

The consultation is intended to raise issues and ask questions rather than propose definitive solutions. It contains assurances as regards "the reinvigoration of regular 'working Together' meetings between groups of local tax agents and HMRC staff".

I've no doubt there will be cynics who will doubt the sincerity of some of the aspirations set out in the document. In my view however I think the message has finally got home. Accountants and tax advisers are a critical element in making our tax system operate effectively. This is something that representatives of the main professional bodies have been trying to bang home for some years now. I recall Ian Hayes, my predecessor as Chairman of the ICAEW Tax Faculty, telling us how he had been stressing this point at every opportunity some years back. And many of us have repeated it more recently.

Simply stated, with ever reduced internal resources, HMRC need to be able to rely on the work done by reputable accountants and tax advisers. If you are in practice you have a choice. You can either help your clients to fulfil their legal obligations and do so in a professional manner, or you can (deliberately or otherwise) keep your clients' tax bills to a minimum through dubious means whilst hoping that HMRC's stretched resources will not catch up with you or your clients.

Now is not the time for cynics to dismiss this invitation to contribute to the debate. I think it's a once in a lifetime opportunity to contribute to HMRC's plans to enhance its relationship with accountants and tax advisers. This invitation is a direct result of the efforts made by many in the professional bodies over many years of debate and discussion with HMRC.

The Tax Advice Network will be formulating a response and welcomes contributions from 'tax agents' who have considered views but do not intend to respond to the conultation themselves.

Do please add your comments to this blog post or email us through the feedback facility on our website.

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?

Know your limits

A senior official at a big publisher told me recently how he once prevented what could have been a major PR disaster. His marketing team had been working on the copy they wanted to use to promote a new easy to use online tax service.

Their favoured headline?

"For when you want to advise on something you know nothing about"

Fortunately the official immediately recognised the potential downside of such a headline. If an accountant used the service and then gave advice which turned out to be wrong he might try to sue the publisher. Indeed the promotion also ran counter to the Guide to Professional Conduct for those working in tax. I have referred to this before on the TaxBuzz blog. (I sit on the pan professional body working party that is updating the 2004 version for the ICAEW, CIOT and 5 other professional bodies). One key paragraph often comes to mind:

“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”.

Thus it won't surprise regular readers if I offer an alternative solution 'for when you want to advise on something you know nothing about'. Don't. Don't risk getting it wrong. Our tax system is now so complex there is no shame in admitting to a client that the matter in hand requires specialist input. Doctors adopt this approach all the time. So do dentists. So do all wise professionals.

Indeed one has to question whether any 'professional' would ever advise a client on something the professional doesn't really know about.

And if you do want to speak with a VISTA (Vetted Independent Specialist Tax Adviser) I hope you know where to start!

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.

Telling the taxman about undisclosed earnings

The lead comment piece in this week's Taxation magazine comes from Mike Thexton who, like me, regularly lectures to accountants. The article is a wonderfully told story about a recent experience he had after a friend sought his help with resolving a tax problem. And there is a key lesson I want to highlight in this blog post. If it resonates with you please add a comment below.

Mike says it all started with 'the dreaded question'. When someone who knows you are an accountant (or in his case a VAT lecturer) asks for your help in resolving a tax problem that requires knowledge and experience way outside your comfort zone. As Mike says, it's because people tend to assume that accountants know about all things tax, just like they assume that doctors know about all things medical.

Mike describes himself as "A VAT lecturer who prepares a few personal tax returns each year - I have never dealt with disclosure and settlement of underdeclared liabilities." He then asks himself a key question: "Should I simply pass [this] on to someone else?"

When I read this my mind immediately went back to a key paragraph in the Guide to Professional Conduct in Relation to Taxation'. (I sit on the pan professional body working party that is updating the 2004 version for the ICAEW, CIOT and 5 other professional bodies):

“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”.

Mike complied with this advice and sought the input of a friend who chairs the tax investigation service at Baker Tilly, a top ten firm of accountants.

I've summarised below some of the key lessons drawn from Mike's article:

• "Do not do this by yourself if you have no experience" - This accords with the Guidance above and was the recommended advice given to Mike by John Newth;
• "Find someone who knows what to do. The client may baulk at the level of fees, but it is likely to be worth it in reduced trouble and penalties"
• "What was unfamiliar to [Mike] was routine to someone who works in investigations."
• You need to address the underpayment of Class 2 NICs totally separately to the underpaid income tax and Class 4 NICs which were to be covered by the main settlement.
• The relative speed of securing a full settlement with maximum mitigation of penalties when you know what you're doing.

And possibly the most surprising observation of all - that Mike found his "limited adventure in investigations was an unusually positive experience". He also found the local tax office "helpful, efficient and reasonable." This is probably a reflection on the way that Mike and his friend approached the matter and that they did so as guided by a tax investigations specialist. What do you think?

For others faced with similar situations I would suggest that the independent tax investigation specialist members of the Tax Advice Network should be your first port of call.

Ten tax mistakes that could result in professional negligence claims

• Omitting to consider the VAT implications of significant property transactions;
• Loss of tax credits as entitlement not claimed early enough – eg: when unincorporated business client suffers a loss;
• Failure to claim research and development tax credits before deadline;
• Omitting to reorganise group companies to reduce ‘avoidable’ tax charges;
• Failure to advise clients to correct their payroll procedures so as to reduce penalties;
• Omitting to provide ‘standard’ tax planning advice on arrival or departure from UK, on mergers, on acquisitions, pre sales;
• Ignoring consequential adverse implications leading to avoidable tax liabilities (eg: VAT, SDLT, IHT, NICs, Customs duties etc) when giving commercial or ‘basic’ tax advice;
• Omitting to compute and report the tax consequences of transactions such as disincorporation;
• Failure to ensure that all relevant criteria are satisfied to facilitate a claim for specific reliefs (eg: Enterprise Investment Scheme);
• Assuming that there would be no liability to inheritance tax and failing to advice as to how the real liability could be reduced;

The above list forms part of the material covered in my regular talks for accountants and tax advisers on the subject of 'How to avoid professional negligence claims'

Doesn't the taxman trust tax advisers?

A recent Special Commissioners decision contains a number of important lessons for accountants and tax advisers as it effectively revolves around the issue of whether HMRC believe assertions made by accountants.

You can access the full facts and details of the case of Mr M Ransom v Revenue & Customs [2008] UKSPC SPC00708 if you have time to read them. If you do and you have any further observations, please add them by way of comments to this blog post.

The only matter on which the Special Commissioner had to reach a decision was whether an amended tax return for 2000/01 had been filed before the effective deadline of 31 January 2003. The taxpayer's accountant claimed that the return had been hand delivered to the Woking Tax enquiry office on the evening of Friday 31 January 2003. The Revenue however argued that the amended return was posted to the office and did not arrive until 7 February 2003.

For the record the return was being amended to reflect the decision in Mansworth v Jelley. This was only published in December 2002. And let's remember that many accountants and tax advisers were under extreme pressure in January 2003. Everyone was trying to complete the necessary amendments and claims for clients who could benefit from the Revenue's published interpretation of the implications of the decision.

Returning to the present. What are the lessons that accountants and tax advisers can learn from the Ransom case?

1 - As I have recorded on this blog before (in the context of discovery assessments), it is crucial to be able to evidence all statements that are to be made before the Commissioners. There will be no second chance to represent the evidence;

2 - It is risky waiting until 31 January to file paper based tax returns and amendments to tax returns. Given the new 31 October deadline for paper based returns this issue is less likely to recur;

3 - The time lag between the start of a dispute or a challenge with HMRC and the case reaching the Commissioners can be years. In this case the argument started FIVE years ago. And this was a relatively straightforward question: When was the amended tax return filed?

4 - If HMRC have reason to question your honesty or your judgment they will pursue the matter. Ultimately the Revenue's position in this case effectively impugnes the character of the accountant in question;

5 - Even when you are in the right, do not under estimate the time and effort that will be required to produce all necessary evidence to support your contentions. In this case the accountant and four colleagues all gave evidence to counter the Revenue's challenge;

Do you have any observations about the implications of this case? Please add your comments to this blog post.

More and more accountants will find themselves having to advise on tax credits

The current issue of the ICAEW's Tax Faculty's Taxline magazine includes a topical and timely reminder as to the potential impact of the new Annual Investment Allowance (AIA). It serves to reinforce a point I make in my talks about How to avoid professional negligence claims.

Question one
I always ask for a show of hands as to how many accountants in the audience advise clients about their entitlement to claim tax credits. I've spoken to groups of all sizes, from 20-180 and to date no more than 5 hands ever go up. This suggests to me that the vast majority of accountants are not currently advising clients about their entitlement to claim tax credits.

I know why. Tax credits are merely a new(ish) dressing for a social security benefit. Accountants have not traditionally advised on benefits. It's not cost effective to do so and we don't know all the rules.

Some, but not all, accountants make clear in their engagement letters that they do not advise on tax credit related issues. That is their prerogative and in so doing they probably reduce the prospect of a client making a successful claim for negligence at a later date.

Question two
I then ask the accountants whether they advise their clients on how best to offset losses, on capital allowance disclaimers, pension reliefs and (now) AIAs. Of course they all do. Indeed, securing tax refunds tends to go down well with clients. In fact, clients tend to value anything their accountant does that reduces the tax payable or that secures the biggest tax refunds. And if they perceive that their accountant isn't doing all they could in this regard, they are inclined to switch to one who does.

And, tax credits (so far as clients are concerned) are TAX credits.This means they are seen as TAX refunds. Exactly the sort of thing that clients expect to get help on from their accountant. And if their accountant doesn't help in this regard then it won't be long until the client switches to one who does. Especially if the client becomes aware that he missed out on claiming tax credits as his accountant didn't tell him when he should have done so. (The 3 month limit on 'back claims' for tax credits is a real problem here).

If the commitments I note at the end of my seminars and training sessions are anything to go by, an increasing number of accountants will be advising clients on their entitlement to claim tax credits. It doesn't have to be time consuming and it can be done profitably.

Please share your views as comments on this blog whether you already advise on tax credits or you have no intention of doing so.

Is it safe for general practitioner accountants to give tax advice?

Last week a regular contributor on AccountingWeb questioned whether or not it is safe for general practitioners to continue to give tax advice. This is in the light of my recent article in which I explained why, two years back, I gave up giving tax advice.

To paraphrase my response on that thread:
Of course it is safe for general practitioners to continue giving tax advice - as long as they recognise their limitations. I didn't want to struggle to keep upto date with day to day issues as was required for me to continue to give tax advice myself. That was my choice.

Over the last few years I've been presenting a talk to accountants around the UK on Avoiding tax related negligence claims. To paraphrase one of the topics I address: If you're accused of negligence the claimant has to prove that you owed them a duty of care and that they have suffered a loss and that the loss arises from your negligence (ie: that you have breached the duty of care). Your defence will often be that you did the same as any 'reasonably competent' accountant would have done in the same situation

'Reasonably competent' accountants comply with the Guide to Professional Conduct for those working in tax (which has been adopted by all of the main accounting and tax bodies). It includes a paragraph:
"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”.

This should surprise no one. And of course, it's one of the reasons why I established the Tax Advice Network as a resource for accountants in general practice. It enables them to access their own choice of cost-effective, vetted, independent tax specialists as and when faced by tricky tax issues or problems that would take them outside their comfort zone.

Increasing PI rates?

I spotted an interesting piece in the Lawyer this week about tax related professional negligence claims - a topic close to my heart as I regularly speak about it to groups of accountants.

It's written by Steve Holland who is a director in the ­professions division of Lockton International. As they are insurers to many accountancy firms as well as law firms his views may be of interest.

This was the quote that caught my eye:

Insurers will also be looking at tax issues – an area where there has been large ­numbers of claims arising from a lack of clarity on legal firms’ retainers and whether that has been included in the terms of engagement. Insurers are saying, “Okay, if you’re giving tax advice, is it in relation to implementation of schemes by others or is it in relation to their own schemes?”

I tend to think this is equally relevant to lawyers, accountants and tax advisers. Those who have heard me speak on the subject will have heard me state that HMRC often challenge schemes that may well work in theory. The challenge succeeds though as all of the necessary component elements were not properly implemented. The meetings didn't take place. The papers weren't signed by the right people in the right place or whatever. And who is it who is left 'holding the baby?'

The promoters of the scheme are often long gone and out of the picture. Who gets lumbered with trying to resolve things - often without getting paid for the time that this absorbs?

Coming back to Steve Holland's note above, where does this leave the regular adviser who does not create such schemes?

How confident are you?

One of the most powerful factors that affects whether an accountant will refer tax queries to tax adviser members of the Tax Advice Network is the level of confidence that they have. Are they

* Rightly confident that they know enough and that there is little chance of being wrong?
* Over confident and reluctant to seek a second opinion?
* Lacking in confidence and worried that clients will think less of them if they admit what they don''t know? (They''ll certainly be unhappy if the accountant gets it wrong, that''s for sure. Most clients recognise that their accountant is like their GP and that sometimes there is a need to go to a specialist);

What about you?

Ten top tips to avoid professional negligence claims

I created this list recently for a forthcoming article in the professional press. It’s drawn from my talk, How to avoid tax related professional negligence claims, which I have been presenting all over the UK for the last few years.

1 - When providing tax advice always state the known facts on which your advice is based - in writing;

2 – Equally state any assumptions you have made – in writing;

3 – Create contemporaneous notes of all material advice and of the assumptions you provide during meetings and telephone conversations;

4 – When advising, ask yourself whether you’d be happy for a close friend or family member to rely on the advice. If you’re not sure, do additional research, get a second opinion or involve a tax specialist colleague or trusted third-party (such as a member of the Tax Advice Network);

5 – When advising clients of forthcoming deadlines, focus their attention on the date that you need to receive the information to beat the statutory deadline;

6 – Avoid under-pricing work and introducing time-pressure that could exacerbate mistakes;

7 –Stick to what you know. If a client requires or requests advice on subjects outside of your comfort zone, involve a tax specialist colleague or trusted third-party (see above!);

8 - Stop working for those clients who are more trouble than they are worth. These are the clients who resist paying decent fees, don’t contribute to the growth of your practice and who are most likely to complain, given half a chance.

9 – Manage client expectations and avoid over-promising and under-delivery. Remember that a client’s perception of these may be very different from yours.

10 – Keep uptodate – eg: with the free weekly email containing practical topical tax tips for accountants in general practice from the Tax Advice Network.

Tax assurance for tax partners in smaller practices

This idea was put to me recently. I wonder how much interest there would be among the hundreds of accountants and tax advisers who have already registered on the Tax Advice Network website?

Almost no one can be an expert in all areas of tax - especially those that they don't have to consider very often. Are there ever situations where a report or paper is required for a client but where you have neither the time or inclination to research and write something from scratch?

Would it be helpful to instead choose and brief a suitable tax expert from the Tax Advice Network? Your role could then be focussed on guiding your client through the advice and helping them to decide what and how to take action. You'd be adding value and everyone would benefit from the way you have effectively 'outsourced' the specialist tax work. You will also have reduced the risk to your practice of giving advice on a subject with which you are not really that familiar.

Of course some people prefer to research new things all the time and are able to recover all of the associated fees from clients. But even then, wouldn't a second opinion be a valuable part of your tax assurance process?