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 channelling 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. 

• If any of the countries on the EU’s blacklist of “non-cooperative jurisdictions” (this includes countries such as Barbados, Bermuda and the UAE) appear on a company’s balance sheet, it’s worth digging a little deeper.

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.

In summary

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.

Further reading on ethics:

• AAT ethics helpline: 5 toughest ethical dilemmas
• What history’s least ethical accountants can teach you
• The five fundamental principles of ethics

Ethics is one of the most important aspects of being an accountant. Clients need to trust your professional integrity, and the public needs to have confidence in your standards and principles.

Being a member of AAT is a mark of high standards, high quality training, and professionalism. But there may come a time when you face an ethical dilemma in the course of your work.

This could involve:

• a threat to your professional reputation
• a demand from a client or employer to do something which you consider unethical, unprofessional or even illegal
• or a problem with a client which makes you consider whether you wish to work with them in the future.

To help members maintain standards and provide high levels of professional service at all times, the AAT publishes a Code of Professional Ethics. This sets out guiding principles and gives members of the public the assurance that when using an AAT member’s services, they can expect a professional service.

AAT recognises that sometimes ethical dilemmas can be problematic and difficult to deal with on your own. By being a member of the AAT, you have access to the ethical helpline (details at the end) which enables you to speak to one of our professional standards officers.

They can give you confidential advice on your situation and advise you on your options. They can also direct you towards other organisations which could help or suggest that you take legal advice.

Calls tend to peak around year-end when members are reviewing accounts and receiving emails from clients.

We met with the team behind the AAT ethics helpline to hear about the toughest and most common ethical dilemmas they’re hearing from our members. We also found out how the AAT ethics helpline may be able to help you resolve these issues in case you encounter them yourself.

1. What rights do I have when I’m disengaging from a client?

If you’ve made the decision to stop working with a client, and they haven’t paid you, should you tell the incoming accountant? Are you able to retain documents that belong to the client if they have not settled the invoice?

“These are both issues that could arise in day to day work and we are here to help members navigate the code of professional ethics,” says Adam White, Professional Standards Officer, AAT.

“The first step when a member calls is to ask whether they have reviewed AAT’s Code of Professional Ethics. We want them to consider the issue in light of the five fundamental principles of the code, and then decide which of those principles are in jeopardy.”

“By talking with the member, we get to understand what the dilemma is,” he says.  

“Right of Lien – where a client has not paid and the AAT member wants to retain records or certain documents from them – is a subject about which we receive many calls,” says Donna Drew, Professional Standards Officer.

“We look at the issue on a case by case basis, but it may be that we recommend that they seek legal advice.”

2.You’re working at a company and you’re asked to do something which you feel is wrong or illegal

This dilemma frequently involves a person who is employed and has been asked to do something that they consider unethical or illegal, often by a manager or business owner. It might happen in a small company where the managing director or owner has a lot of control. For this reason, it can be very awkward and they might eventually have to leave the company if they’ve tried other options.

“It depends on the situation, but if you are asked to do something unethical or wrong, and you’ve got to the end of the line in terms of raising it within the company, you may have to determine whether you want to continue acting for that client, or working for that employer,” says Adam White. “It can be very difficult for a person who is employed, as they may be sacked or have their employment terminated.

“From the point of view of anti-money laundering, we have a helpline for people who have questions or concerns. Anything that’s related to the proceeds of crime, and that might include the underpayment of tax, could fall under the remit of anti-money laundering.”

Find out what you can do when clients don’t tell you everything…

Issues often arise in relation to tax, and the Professional Conduct in Relation to Taxation (PCRT) can be used for specific guidance on matters that relate to tax.

This could include tax avoidance schemes, or if a member knows that there is an error or omission in a client’s VAT. It could include also historical issues regarding underpayment of VAT.

Members may need some guidance on how to bring this to the attention of the client, as you have to get the client’s permission to report because of confidentiality issues, Adam White says.

3. Should I work for someone who is being investigated by the police?

Marlene Prentice APCIP, Professional Standards Officer, says she was called by an AAT member who had read in the local newspaper that one of his clients had been called before the Crown Court regarding NHS overclaims for his dental practice.

What should he do and how should he approach the client?

“We advised him that the information was in the public domain so he could let the client know that he had seen the report and he could express his concerns,” she says.

Although some people might think that you have to disengage in such a situation, it’s for members to assess on a case by case basis, she says.

“It’s important to speak with the client and find out all the information. Don’t jump to conclusions. Make a decision weighing up the information you have, and what you need to do to safeguard your position.”

Another member was contacted by a man who was being investigated by the police because he had been growing cannabis from his home. The man claimed it was the first time he had ever done it and he wanted to show the police evidence of his finances, and that he hadn’t had unusual deposits into his bank account which might have been the proceeds of drug crime.

He wanted to find an accountant who would prepare a report for the police .In this situation, the client was entitled to ask an accountant for help.

“We can’t tell members what to do but we can help them make an informed decision,” she says.

4. I work with two directors at a company and they’ve fallen out and are giving me different instructions

Another common issue is warring or divorcing partners in a business.

“Everything may start off amicable, but then the accountant finds themselves caught in the middle when things turn sour,” says Marlene Prentice.

“The question is, from whom should I be taking instructions? You need to make it clear to both parties that instructions need to be clear and not contradictory. You can decide whether to disengage or continue, based on their response.”

She says there’s not a right or wrong answer and that the situation changes depending on the information that you have.

“Generally, we act as a sounding board for the member – often they already know what they need to do but are just looking for some help and guidance.”

“With warring directors, you would need to manage the situation,” says Dharmila Bhanji, Professional Standards Officer. “Email both parties and ask for clear direction. You can call us the minute you feel uncomfortable and we can help you identify what next steps you want to take.”

5. I’m thinking of disengaging from a client because I have ethical concerns

Errors in accounts prepared by previous accountants, or difficult behaviour from owner-managers, can be problems when working with limited companies says Donna Drew, Professional Standards Officer.

“I dealt with one case where a client of an AAT member was refusing to submit their company accounts because they knew they had tax liabilities and they couldn’t afford to pay. In that case, the AAT member had to give them the final opportunity to submit their accounts, and then disengaged.”

Another issue arose when a member was in the process of disengaging from a client. The client asked the accountant to leave all the documentation behind an unlocked side gate.

“The member felt that this was not sufficiently secure and that they might be contravening GDPR and security of data rules if they left the files unattended,” she explains.

Contact the ethics helpline

To discuss any ethical questions you might have, call us on +44 (0)20 7397 3014 or email [email protected].

The guidance that the Ethics Code provides covers a number of important issues:

1. Threats and safeguards – a threat might potentially compromise a member’s compliance with the fundamental principles
2. Conflicts of interest  – when it would be difficult for a member to be objective in certain circumstances
3. Integrity – the obligation to be straightforward and honest
4. Objectivity – not to compromise professional or business judgement because of bias, conflict of interest or the undue influence of others
5. Professional competence and due care – ensuring that your professional knowledge and skill are maintained at the level required to ensure that clients or employers receive competent professional service. It requires members to act diligently in accordance with technical and professional standards
6. Confidentiality – not disclosing information obtained in the course of your work, even in a social setting
7. Professional behaviour – adhering to competent and professional standards at all times

Further reading on ethics:

• What history’s least ethical accountants can teach you
• How to judge ethically grey areas
• The five fundamental principles of ethics
• PCRT guidance from AAT