Yesterday HMRC published its discussion document Strengthening Tax Avoidance Sanctions and Deterrents.
Having taken time to digest the consultation document, I think this is a welcome proposal, and here are my reasons why.
The proposal recognises that the vast majority of tax payers (and following on from this, it would be fair to assume agents) comply fully with their tax obligations; something which in my experience of AAT members rings true. On this basis the majority of agents will not be adversely affected by this but should embrace the proposals because they will level the playing field, ensuring that those who design, promote and “enable” aggressive and abusive tax avoidance schemes are held to account.
To date such accountability has lain with the tax payer. So for “enablers”, this is a low risk, high reward business, attractive to those who do not care for the wider public interest argument associated with following the spirit as well as the word of tax legislation. But does current aggressive avoidance practice, undertaken on the basis of “the best interests of the client” actually best serve the interests of the client? In my view, it does not.
We have seen an increasing number of cases where HMRC has successfully defeated tax avoidance schemes, for the example the relatively recent high profiles cases of Eclipse 35, Greene King, or Cyclops Electronics. In these cases clients had relied upon advice given by those they considered to be experts in taxation in order to, in their view, legitimately minimise their tax exposure. In reality their liability ended up exceeding alternative acceptable tax planning arrangements. Would their advisers have been as tenacious in promoting the schemes had they risked a liability of Eclipse 35 proportions themselves? I’m not so sure.
Let’s take Eclipse 35 and consider this in more detail. According to the FT, users of the scheme face paying around £117m in unpaid tax and penalties. Other reports indicate that the Advance Payment Notices (APN) issued by HMRC had brought some “investors” in the scheme to the verge of bankruptcy. It would be a rather tenuous argument to justify the means on the basis of the end.
And in my view, the Eclipse debacle and other notable defeated avoidance schemes undermine public confidence in the provision of professional taxation services. The only interests truly served in these cases are those of the advisers, who whilst risking lawsuits for negligence, can assess the likelihood of such challenge as low when their client is verging on bankruptcy following defeat of the scheme.
Self-interest is a threat all professional accountants should be aware of, and take action to reduce to an acceptable level. AAT’s Code of Professional Ethics, which is based on the International Ethics Standards Board’s Code of Ethics for Professional Accountants, identifies two types of safeguard: safeguards created by the profession, legislation or regulation, and safeguards created in the work environment.
There is no better example of the former than HMRC’s proposals. And with “enablers” now having to assess their schemes in the context of their own liability, the self-interest threat should reduce, the client’s interests will therefore be better served, and overall, the public interest outcomes HMRC seeks will be manifestly more achievable on this basis.
Tania Vanburen is AAT's Head of Professional Standards & Strategy.