Open letter to ICAEW President – Subscriptions and Tax

Subject: Subscriptions and Tax

To the ICAEW President,

Imagine a world in which the Government suggested that a lawyer should be fined if their barrister lost a case. What would be the reaction of the Law Society?

Now, we have a Government proposal for something similar for the accountancy profession. It says (see 5 December – Sanctions and Tax Deterrents) that Government policy is to reduce the size of the tax advice ‘industry’, by threatening fines on ICAEW Members, even where they were acting legally and honestly, with a side effect of deliberately adding mayhem to Professional Indemnity Insurance quotes.

I fear this would affect all members in practice. Some may say, “I do not advise on tax avoidance,” but the trouble is that tax avoidance is not properly defined in the proposed legislation. The scope is wide, with the Government proposing that the State should have the power to fine professionals for ‘enabling advice to be given’ [not just advising] on what amounts to any commercial transaction which involves tax. Advisors would not necessarily know for some years whether their conduct was “incorrect”, because it would apply if the State subsequently won relevant litigation. Then, suddenly, advice given in good faith may become a punishable offence. Work out the justice in that.

Why should ICAEW Members, taught to act ethically and responsibly, be fined and punished, for example, for simply referring a client to advice from a QC?

This brings us to a key question. Are the ICAEW going to protect members from penalties, which are unjust? I feel the initial response from the ICAEW is disappointing. Yes, the new HMRC document is better than the original consultative work, but they are still far too broad and wrong in principle. HMRC admit this particular policy is not targeted at the true purveyors of ‘tax avoidance’, but to impose sanctions on “enablers”. Why should bystanders be punished, because HMRC find it difficult to administer the tax system?

The Institute document also notes that HMRC has announced that they “Do not expect that members acting ‘wholly within the spirit’ of the standards contained within the recently-updated Professional Conduct in Relation to Taxation” would normally be affected by the enabler provisions. Well super! So you can hope [not guarantee, note] you may not get punished, if you act under Ethical Guidelines. I would hope that all Members would act under ethical guidelines. However, if I acted under such guidelines to give independent advice, I would “hope” that I would be backed by ICAEW in saying I had acted in a proper professional manner. I would not expect it to be second guessed by some State Official most likely without similar professional training to determine if they agreed I was in the “spirit” of such guidelines.

I totally agree HMRC should be properly resourced to review the system they have to work with, with an efficient, trained and motivated staff, but then it must have a parallel, independent appeals system. It is the way of Dictators to “improve” an appeals system by persecuting appellants and their advisors. It should not be a route a UK Government aspires to, however “efficient” it seems to have no-one disagree with the State. Maybe the policy is designed to help in “Making Tax Digital”? If “enablers” of independent advice have been eliminated and if incorrectly arguing with an official means a fine, then surely 99.9% of the population will agree their tax assessment is correct, probably even if the Government computer “proves” it was 117.5% of them.

I worked hard to get my qualifications as an FCA. It has been something I have been proud of. Thanks to Government propaganda, it now feels like I am one step down from a shoplifter.

I believe such propaganda is lazy, because it suggests the problems in the tax system are down to ‘Accountants – and other such slimy creatures’. I could suggest other causes? HMRC staff and administrative cuts, poor policy co-ordination, vast systems and culture changes at HMRC which do not seem to have worked? Perhaps even a level of competence at Government level which drafts a referendum bill which then needs to go to the Supreme Court to determine whether Parliament meant “Yes or No”, or were only joshing? The Institute should point this out to the Press, rather than kow-towing to Press oversimplification because accountants seem ‘easy meat’.

ICAEW, please stand up for your Members. You want our subs. You should protect all of us, even if that means telling the Government they are wrong.

Manuel alive and well and working in Whitehall – Tax Avoidance Deterrents

After the recent tragic death of Andrew Sachs, there are rumours that his spirit for competence lives on in our legislation.

 TAX AVOIDANCE DETERRENTS

An open question for the above.  How do the current proposals (published on 5 December 2016 as Sanctions and Deterrents) fit with The Rule of Law?

I believe in the vital importance of the Rule of Law.

I believe it can only work with;

a) Clarity

b) Independent Judgement

c) Consent

Naively; having been trained as an Inspector of Taxes, I believe that the intention of Parliament was as set out in the words they enacted.  There is a lot of case law which supports this.

With 17,000+ pages of legislation the situation is complex.  There may be a dispute as to interpretation.  That arises, almost certainly, through lack of clarity (see (a) above).  The disputing parties are then dependent upon ‘independent judgement’ which hopefully they can both trust – effectively the Rule of Law (cf Tom Bingham).

If they do not trust the independent judgement then (c) Consent is lost.  That is dangerous.

Probably with good intentions (I am told they pave the Road to Hell) HMRC are saying that certain professionals need their behaviour modifying.  To quote the ‘Strengthening Tax Avoidance Sanctions and Deterrents in their paragraph 5.4:-

The government noted the views and responses provided. It recognises that the avoidance market is not static but is constantly evolving. HMRC will further develop the options set out in Chapter 5 of the discussion document to supplement the important work undertaken in this area to date, whilst looking at new and emerging threats in the avoidance market. Alongside this, HMRC will continue to explore ways to further discourage tax avoidance by:

  • working collaboratively with businesses, individuals, industry and representative bodies to identify opportunities to further shrink the avoidance market
  • exploring how behavioural change techniques can positively affect decisions and choices for enablers and users
  • tailoring communications and engagement with users to support them to make the right choices and decisions including outlining the risks and consequences of entering into these kinds of arrangements
  • meeting the challenges and opportunities that current and proposed legislation, HMRC’s Making Tax Digital Programme and other cross-sector initiatives may present

In paragraph 5.5 they go on to say:

The government will continue to take decisive and necessary steps to ensure that those who seek an unfair tax advantage, or provide services that enable it, should bear the real risks and consequences for their actions.

So that is clear now?

Quite apart from their appalling grammar, and resulting lack of clarity, the proposed result of this appears to be:

i) An advisor may introduce a client to (say) a Queens Counsel who suggests a course of action he believes to be legal.

ii) Sometime – [likelihood, at least 10 years from final date of action bearing in mind current complex litigation process] – advice and action may be proven correct.  End of story.

iii) Alternatively, in the litigation lottery of the Courts (talk to lawyers!) the advice may prove to be incorrect.  In this case penalties would be sought against the person who introduced the QC, in all good faith!  Is asking for professional advice to be subject to a penalty?

iv) The proposed legislation encompasses virtually all commercial arrangements, not just ‘artificial’ ones.  ‘Tax Avoidance’ is not properly defined.  It rests on ‘losing’ under untested legislation.  There is no safe harbour.

v) The level of penalties (see time line) may be after the advisor retired.  If the professional involved advised clients wealthier than him, which I am sure the majority do, then they could result in severe financial embarrassment, perhaps even bankruptcy, of said pensioner.

The tone of the HMRC document of 5 December 2005 suggests that would be [perhaps in Chairman Mao’s words?] a good behavioural adjustment.

vi) Maybe?  In contrast, if the advisor had introduced his client say to a robber or a drug dealer, rather than a (presumably respectable) Queens Counsel, then these sanctions would not apply.  In considering this, what is ‘the Clear Intention of Parliament’ to quote a phrase.

I would be grateful if any of the parties to whom this is addressed could explain to me how it fits in with the idea of any penalty fitting in with the criteria proposed in HMRC’s 2015 penalties discussion document:

  • The penalty regime should be designed from the customer perspective, primarily to encourage compliance and prevent non-compliance.  Penalties are not to be applied with the objective of raising revenues.
  • Penalties should be proportionate to the failure and may take into account past behaviour.
  • Penalties must be applied fairly, ensuring that compliant customers are (and are seen to be) in a better position than the non-compliant.
  • Penalties must provide a credible threat.  If there is a penalty, we must have the operational capability and capacity to raise it accurately, and if we raise it, we must be able to collect it in a cost-efficient manner.
  • Customers should see a consistent and standardised approach.  Variations will be those necessary to take into account customer behaviours and particular taxes.

From an initial review, the proposed penalties fail all counts.  Specifically, they do not seem

1)     Fair

2)     Proportionate, nor even remotely consistent.

They are potentially an invite for state bullying.

An easy way around the problem is the one which worked for many years historically.  It was for independent, disinterested advice with proper, well-resourced HMRC review.  In such a case ‘reasonable care’ all round could be provided by someone, properly qualified, who was not rewarded as to outcome and gave independent advice as to the law, with subsequent full disclosure of any relevant arrangements.