This Blog is addressed to All Accountants. The majority of you will give ‘tax advice’, but would you care to pay your clients’ tax bill if it proves to be technically incorrect? [Under the proposals discussed below the client will pay the newly imposed bill as well so there is at least ‘double jeopardy’]. My worry is a conceptual one. Should there really be multiple punishments for the same purported ‘offence’? Would this not be disproportionate? I do not know if the words are meant to be forceful and intimidating but the ‘deterrent’ seems to envisage liabilities which could lead to the bankruptcy of professional accountants who were merely part of the ‘supply chain’. Concerned yet? Read on.
In due course, I hope to give intelligent feedback to HMRC on their Consultative Document; Strengthening Tax Avoidance Sanctions and Deterrents. In the meantime, I would like opinions from professionals (and others) to the proposals. I have an open mind, and certainly do not approve of dishonest behaviour = evasion.
However, when I was an Inspector of Taxes the next level up on the spectrum – avoidance was legal.
Initial thoughts for discussion:-
- Logically, people indulging in ‘avoidance’ are obeying the law. Why should they be punished in that case? Even if incorrect on a technicality there is no ‘mems rea’.
- The definition of ‘tax avoidance’ seems very vague. It is also the subject of post event review in that a court will judge – probably some years later. This makes it difficult to judge at the time of giving advice. Surely, HMRC should be encouraging independent professional advice, not discouraging it. If clients know the ‘safe harbour’ for accountants is always to advise against a tax saver, they will know they are not getting independent advice. (See HMRC document on protection against penalties).
- Should it really encompass ‘any transaction’ as suggested by the discussion document?
- Should advisors really be subject to such harsh penalties, which may well be orders of magnitude above their fees for client behaviour (not the accountants behaviour) which, after complex litigation, the Courts have found ‘unreasonable’ under GAAR. This means the behaviour was determined to be technically flawed but probably not illegal? This is deterrence, but deterrent to giving advice to key entrepreneurs and wealth creators in a highly complex area.
- Again, initial thoughts for discussion, if the HMRC target is (as stated) a ‘small minority’. Why try to affect the general economics of professional advice? Surely, the penalty risk could have a profound impact on PI insurance costs?
- Could not the HMRC objectives be achieved by:-
a) Stating that a protection from penalties (not tax) may be achieved by getting a written opinion from an appropriately qualified professional (to be defined – but relevant professional qualifications).
b) Stating that a person/firm receiving a monetary benefit/commission based on the scheme may not qualify as ‘independent’.
Surely this would be easier and more proportionate.
As you may be aware, new rules are being introduced with effect from April 2016 as part of the Finance Act 2016. These relate to distributions in a winding-up/liquidation and are designed to target certain company distributions in respect of share capital in a winding-up. Where a distribution from a winding-up is caught, it is chargeable to income tax rather than capital gains tax.
The rules apply where the following conditions are met:
- The company being wound up was a close company (or was within the two years prior to winding-up)
- The individual held at least a 5% interest in the company (ordinary share capital and voting rights).
- The individual continues to carry on the same or a similar trade or activity to that carried on by the wound-up company within the two years following the distribution
- It is reasonable to assume, having regard to all of the circumstances that there is a main purpose of obtaining a tax advantage.
Whether or not Conditions C or D are triggered could be a cause for some contention, and so HMRC note that they have received a number of clearance applications relating to these new rules.
In the absence of a statutory clearance procedure under the new legislation, HMRC have clarified that it is not their general practice to offer clearances on recently introduced legislation with a purpose test. They have instead sent out a standard reply providing some examples of how they think the rules will apply.
Clearly this is a developing area and HMRC’s reaction is somewhat disappointing as taxpayers often require certainty before carrying out commercial transactions which could be caught. HMRC have stated that further guidance will be published, however in the meantime we advise that care be taken, and seeking professional advice, as always, may save time and costs in the long run.
We would be delighted to assist if you think you may be affected by these rules and have any queries.
Typically, PAYE has been described as an ‘approximate’ method of collecting tax due, which remained the ultimate liability of the employee.
Recent judgements, including the case of Paringdon Sports Club, suggest more of the risk may fall on the employer.
In addition the risk may be worse with the current HMRC penchant for penalties. Many advisors will be familiar with their tendency to seek around 15% extra tax for relatively minor ‘careless’ errors. This represents increased risk for business and their advisors.
There are methods related to potentially mitigating or suspending such penalties.
To avoid embarrassment and excessive cost a prudent review may seem sensible?
Whilst most businesses operate routine PAYE relatively easily with the backing of software, experience suggests that ‘unusual’ or one off events can cause problems.
These days such errors can lead to expensive penalties, so procedures should be put in place to check the correct treatment on one off matters and if necessary take advice.
On the penalty front the case of P Steady shows that it can be worth appealing against a penalty imposition. In that recent case the taxpayer managed to get a penalty suspended where, by oversight he had put down bank interest earned in incorrect years. The Tribunal said ‘The mere fact that this is an error in a tax return does not mean that a taxpayer has been careless’. They went on to say, ‘To levy a penalty on a taxpayer who hereto has had a good compliance record over many years and then refuse to consider suspension of those penalties does not reflect well on HMRC’.
As always thinking of the correct technical position makes sense.