November 21st, 2016
Disclaimer: The views and opinions expressed in this article are solely those of the author in his private capacity and do not in any way represent the views of LexisNexis or Tolley.
As tax advisers we have responsibilities to our clients: we also have legal obligations in relation to HMRC. But what obligations do we have to wider society? If you had asked most advisers that question even five years ago I think that the answer would have been a resounding "none". The government sets the law and the courts enforce it: what happened between a client and his/her adviser was nothing to do with anybody else.
How things have changed. You don't need me to remind me how often the taxation affairs of individuals and companies, and the conduct of their agents, has become front page news. Whether we think that this has been a matter of genuine public interest or simply prurient interest in the tax affairs of the rich and famous, the profession was under pressure to acknowledge the very different environment in which we were working. On 19 March 2015 it no longer became a matter of choice: on that day the Chief Secretary to the Treasury issued a challenge to the profession to "take on a greater lead and responsibility in setting and enforcing professional standards around the facilitation and promotion of avoidance to protect the reputation of the tax and accountancy profession and to act for the greater public good". There was a not very hidden subtext to the challenge: if the profession did not do something the government would force the pace and in some form regulate the activities of tax advisers.
Much has gone on in the background since that date and the result has been the publication of a revised Professional Conduct in Relation to Taxation (PCRT) by the tax and accountancy bodies. The key part of this is the requirement that "members must not create, encourage or promote tax planning arrangements or structures that set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or are highly artificial or contrived and seek to exploit shortcomings within the relevant legislation". This is not mere guidance. It forms part of the rules of those professional bodies and members who do not follow it are at risk of disciplinary action or ultimately expulsion.
PCRT only applies to members of those professional bodies. Many tax advisers, including individuals of the highest competence and integrity are not members of such a body, either by choice or because their career path didn't give them the opportunity to join. Those advisers are not formally within the scope of PCRT, but HMRC has made it clear that it expects non-affiliated agents to apply the same principles. On 3 August it published a document setting out a simplified form of the PCRT principles intended as guidance for such agents. In my experience many people have missed this, and for convenience I attach a copy at the end of this piece.
Where does this leave us all? In some ways it reminds me of the old expression "closing the stable door after the horse has bolted". Had such a prohibition been put in place ten years ago (perhaps even five years ago) it would have created difficulties for many people. A large proportion of the tax adviser population would have worked in businesses which at least to some extent promoted planning schemes which would now be considered beyond the pale, or (and this is equally important) referred their clients (usually for a fee) to those who were promoting such arrangements. In the interest of full disclosure I count myself as being part of that population. Now the picture is very different and only a few firms are still actively marketing aggressive avoidance schemes or referring clients. So is this revised PCRT necessary? Will it simply sat unread and unloved in people's desk drawers?
There is always a danger of this, of course, but this would be short sighted. In the first instance aggressive avoidance has not completely disappeared and those firms promoting it will need to understand the implications for their businesses if they are members of a PCRT body. I suspect that those firms will be well aware of exactly what they are doing and where they stand and they don't need any advice from me. But it is worth thinking about firms who do not devise or promote such arrangements but are happy to refer clients to the boutique firms who operate in this market, especially if they take a referral fee for doing so. When the PCRT talks about "encouraging or promoting" arrangements it seems to me to be referring precisely to these sorts of referral arrangements. I am not the ultimate custodian of PCRT (and I am very glad that I am not) so it may be that there are other ways of interpreting those words, but I think that anybody who does refer clients to other promoters in this way needs to be very aware that they are potentially at risk of a dispute with their professional body.
Where does this leave us in terms of the advice which we can still give to clients? The fact that the standard refers to highly artificial or contrived planning is clearly designed to show that the concern is very much concentrated at the extreme end of the spectrum, for examples schemes where all of the money goes round in a circle and the taxpayer ends up with a loss seeming created out of thin air. But what about results which are contrary to the clear intention of parliament? Again the modifier –the reference to the clear intention is important. The adviser can't be expected to second guess each and every time he/she gives advice what the intentions of parliament may have been. Parliament may not have ever had a clear intention - or indeed the intention of parliament may have got lost in the midst of time. Sometimes other changes fundamentally alter the position. To take one example: s944 of CTA 2010 is now seen as a relieving provision which allows the transfer of losses on certain business transfers. But it was originally intended as an anti-avoidance provision to stop companies manipulating terminal loss relief claims in the pre-1965 era when companies were subject to income tax. Any discussion of the intention of parliament in relation to those rules as they now apply would be meaningless.
What I think that PCTR is getting at when it refers to the clear intention of parliament is those cases where a provision specifically includes an explanation of what it is intended to do. Instances of these are actually quite rare. One example might be ITA s257A, which introduces the new SEIS.
This Part provides for SEIS income tax relief ("SEIS relief"), that is, entitlement to tax reduction in respect of amounts subscribed by individuals for shares in companies carrying on new businesses.
It is easy to see that somebody who, hypothetically, devised a scheme which seemed to give SEIS relief for a non-share investment in an old business could be said to be producing a result which was contrary to the clear intention of parliament.
But in most cases we won't have anything to guide us. Let's take the classic examples of how to manage profit extraction from the family company. Splitting shareholdings between family members, looking at tax efficient benefits, and comparing salary v dividends are likely to be the bread and butter work of many of the readers of this article. Do they have to worry? It seems to be unlikely in the extreme that PCRT could bite in such circumstances. There is nothing contrived or abnormal here. What about the will of parliament? I doubt that there is anything which could actually be said to represent the intention of the legislation. Parliament can be assumed to have intended that dividends would be taxed as dividends, benefits taxed as benefits and employment income taxed as employment income. But beyond that there is nothing to go on: there is no legislation which states how Parliament intended it all to fit together. How could there be: the rules have developed piecemeal over the last 100 years or so without any clear statement of purpose. My personal view therefore is that there is nothing in the new PCRT which should prevent agents from advising clients on these, and many other, areas of straightforward tax planning.
But to concentrate only on the tax planning itself would be to miss an important point. The new PCRT concentrates as much on the "how" as it does the "what". In particular it stresses the point that advice must be client specific and should properly point out to the client areas of tax risk. Much of this goes without saying, but it would be idle to deny that there have been situations in the past where the same tax planning idea has been rolled out to multiple clients without proper consideration of whether or not it was suitable for their particular circumstances. Future examples of this would be contrary to the new PCRT principles. The new standard lays emphasis on proper contemporaneous recording of the basis on which judgements are made. This is obviously right, and something that most people do as a matter of course, but it would be a pity if the PCRT turned into a box ticking exercise. What it is really saying is "stop and think: is the advice which you are about to give to your client going to blow up in your face in a few years' time?" If so, is it really in your or your client's interest, to go ahead with it.
In some cases the existence of the PCRT principles may actually help you. I know that some advisers have in the past found it very difficult to resist offering their clients introductions to promoters of aggressive planning because if they don't offer this service they are at risk of losing the client to a competitor who takes a more relaxed view of avoidance. The changes in the tax climate over the last few years have probably made this less of a problem, but it has not gone away entirely. Now an adviser in this situation can point to his/her new professional obligations as a reason why he/she does not promote or introduce such arrangements. If the client still wants to go ahead after such a clear steer it may be that he/she is not the sort of client which your practice wants to retain.
There are risks with the position that the professional bodies have taken – there is an argument that they have fallen into a trap set by government and that over time there will be further reductions of the space in which we as tax professionals can operate. That is something which will need to be closely monitored. But frankly the dangers of not engaging with government would have been much worse. Very strict regulation of how tax advisers operate would almost certainly have come in and we could have been portrayed as a profession deliberately acting against the interests of society. That is not a place where I would want to end up.
Make no mistake – the environment in which our profession is operating is changing quite rapidly. But good tax advisers giving good quality advice to clients will continue to prosper and they should not feel compromised by any of this. I may be naïve, but ultimately I believe that we can and will emerge as a stronger, more respected profession as a result of this and the other changes to the environment in which we work.
Andrew Hubbard
Editor in chief of Taxation
HMRC guidance for non-affiliated agents
2.1 Integrity
We expect agents to be straightforward and honest with HMRC, for example:
- disclose all relevant information
- don't imply that you're regulated for tax by HMRC
2.2 Professional competence and due care
We expect agents to:
- keep correct and up to date knowledge of the areas of tax that you deal with
- work to prevent errors in your clients' tax calculations or claims
- advise your client to take steps to set matters right where you find errors in their tax affairs
- keep online access credentials safe from unauthorised use at all times
2.3 Professional behaviour
We expect agents to:
- comply fully with tax law and regulations
- ensure your own tax affairs are correct and up to date
- deal courteously and professionally with HMRC staff
- consider the risk to reputation of tax agents, of any arrangements that you advise a client about - for example, tax planning schemes