Tax

Tax avoidance: under the microscope

If accountants fail to report tax avoidance, they could face a tarnished reputation, a hefty financial penalty or even end up in jail. But how do you know if your client is doing something dodgy? Here are some red flags to watch out for…

As anybody who actually does the job will tell you, being an accountant involves much more than totting up somebody’s income before putting it in the post to HMRC. It’s a role that requires being part data analyst, part financial adviser and, increasingly, part detective too.  

That’s right. Although accountants are trained to find any irregularities on a balance sheet, a new law set to be introduced next year (July 2020) will see them channeling their inner Eve Polastri/DS Steve Arnott /Jimmy McNulty a whole lot more.

This new law comes from the European Union and could see accountants, bankers and lawyers face penalties if they fail to report tax avoidance schemes that involve companies/individuals shifting their money to offshore accounts (the UK will still follow this law whatever happens with Brexit).

There are some big penalties for assisting tax avoidance: should HMRC find you guilty of being a “professional enabler”, you could be fined up to 100 per cent of the tax their client avoided.

  • Tax avoidance has been a hot topic in recent years. The Panama Papers data leaks, along with scandals involving Jimmy Carr, Wayne Rooney and Geri Halliwell, has seen some accountants accused of getting too cosy with their clients by concocting complicated schemes to help clients dodge paying their fair share of tax.

To avoid landing in hot water with the HMRC, here are the red flags to look out for

Things seem a little… fishy

Before you even set eyes upon your customer’s balance sheet, try acting upon your gut instinct first. Does the client seem evasive or slightly secretive? Are there any inconsistencies in the information they’ve provided? Do they seem a bit hazy when questioned about their business expenses? Of course, none of these gestures indicate your client is guilty and you should shop them to HMRC pronto. But it can make you more vigilant about anything dodgy that could appear in their accounts.

Also, be on the lookout for sudden lavish displays of wealth. In 2012, some people who appeared in Channel 4’s My Big Fat Gypsy Wedding came under scrutiny from HMRC for spending thousands of pounds on ostentatious weddings, after they’d been spotted spending money on ostentatious weddings in the TV show. If at all suspicious, don’t be afraid to have a snoop on social media, or check Companies House to see if your client has ever been disqualified as a director.

Undeclared earnings

Moonlighters’ are one of the targets on HMRC’s hit-list. These are people who have a hidden income that the government’s tax-collectors don’t know about yet. Their earnings could come from owning a buy-to-let rental property, having a second job such as driving taxis, or even selling crafts on Etsy.

  • If your client is moonlighting, they’ll need to pay tax on any profits, so check if they do have any extra payments aside from their salary.     

Inflated revenues

In 2001, the consulting giant Enron collapsed due to an accounting scandal that still causes financiers to shudder to this day. Its downfall was due to some fraudulent accounting, with its impressive figures for revenue growth (which jumped from $13bn to $100bn in the space of four years) setting Wall Street’s alarm bells ringing.

  • Be prepared to look out for any suspiciously high revenues. Any sudden increases in their inventory/sales ratio should also be noted: it could indicate your client has inflated its stock.

Loan schemes

Loan schemes are used by some people to avoid paying income tax. They’re primarily used by workers in the ‘business services’ industry, such as IT contractors, financial advisers and management consultants. These professionals are usually advised to use an employee benefit trust (EBT) where their earnings for a specific job are paid back to them in the form of a loan. There is no tax paid on these loans (despite the fact it is clearly income) and they are usually never repaid.

  • HMRC is cracking down on these ‘disguised remuneration schemes’ (as it calls them), by applying a 2019 loan charge that has resulted in hefty tax bills for some workers. If your client is using an EBT, it’s worth informing them about these risks.  

Offshore structures

Offshore tax havens are something that only your super-wealthy clients are likely to use. In recent years, there’s been a global crackdown on individuals and businesses who bypass tax through using offshore structures. The leak of the Paradise Papers in 2017 showed the extent of the problem, revealing, for example, how private jet-owners had set up offshore companies so they could rent the aircraft from themselves, therefore sidestepping the need to pay hefty VAT bills. Meanwhile, the likes of Google, Amazon and Facebook have rarely been out of the news due to accusations that they’ve used offshore tax rules to avoid paying taxes in the UK. 

Comb through notes and footnotes

The notes (or footnotes) on a balance sheet usually tell readers about the company potential liabilities and losses, as well as explaining any irregularities. It’s also where you’ll find details about pensions, joint ventures and unconsolidated subsidiaries. And as one accounting guru recently told us, it’s also where “all the naughty stuff is hidden” too.

If your client is dabbling in illegal offshore activity, you’re likely to find any warning signs, such as payments to offshore entities that aren’t part of the group, in these end-of-statement after-thoughts. Your suspicion should also be triggered if you stumble across the vague-sounding term ‘Development Costs’ too.

How to take action

If you suspect evidence of tax avoidance, then ignoring it in the hope it’ll go away isn’t a good idea: the 2017 Money Laundering Regulations means professional advisers (such as accountants) are legally obliged to file a suspicious activity report (SAR) to the National Crime Agency if they come across any dubious balance sheet activity.

SARs are available to download here.

Christian Koch is a contributor for AAT's members magazine, AT.

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