Response to Hmrc Consultation Document: Working with Tax Agents the Next Stage

AAT RESPONSE TO THE HMRC CONSULTATION ON “RAISING THE STAKES ON TAX AVOIDANCE”

1 INTRODUCTION

1.1 The Association of Accounting Technicians (AAT) is pleased to comment on the issues raised in the HMRC consultation document (condoc) on “Raising the stakes on tax avoidance”.

1.2 AAT is a professional accountancy body which has 50,300 full and fellow members and 71,000 student and affiliate members worldwide. Of the full and fellow members, there are 3,800 Members in Practice (MIPs) who provide accountancy and taxation services to individuals, not-for-profit organisations and the full range of business types.1

1.3 AAT is a registered charity whose objectives are to advance public education and promote the study of the practice, theory and techniques of accountancy and the prevention of crime and promotion of the sound administration of the law.

1.4 In pursuance of those objectives AAT provides a membership body. We are participating in this consultation not only on behalf of our membership, but also from the wider public benefit perspective of achieving sound and effective administration of taxes.

2 VESTED INTERESTS

2.1 AAT is responding to the consultation from the wider public benefit perspective of achieving sound and effective administration of taxes.

3 GENERAL OVERVIEW

3.1 AAT endorses the Government’s commitment to robustly tackle tax avoidance, to close down avoidance schemes through legislation and to improve the way that tax avoidance is prevented, detected and counteracted (para 1, Foreword, page 4, condoc).

3.2 AAT shares and recognises HMRC’s concerns as set out in paragraph 3.6 and 7.1 to 7.7 of the condoc concerning mis-description and mis- selling.

3.3 We accept that more needs to be done to protect the public and the Exchequer “from what HMRC acknowledges is a small number of promoters (2.1, condoc) who create, market and sell tax avoidance schemes.”

1 Figures correct as at 30 April 2013 3.4 AAT is pleased that HMRC acknowledges that tax advisers have a duty to meet professional standards of service to their clients (3.2, condoc). We draw attention to the fact that this includes the duty of care, subject to terms of engagement, to ensure that clients have adequate tax advice as emphasised by the recently reported court case of Mehjoo v Harben Barker.

3.5 There is a clear distinction between promoters who may be engaged in attracting customers to schemes such as the Enterprise Investment Scheme (EIS scheme) where, in such cases, it is the intention of Government legislation to encourage and stimulate economic activity and promoters of schemes that target loop-holes in tax law, often with artificial arrangements that have a complete lack of normal commercial justification.

3.6 We note that proposals in this particular condoc are intended to build on anti-avoidance legislation introduced in recent Finance Acts (FA); for example the Employment Income Provided through Third Parties in FA 20112, revisions to Disclosure of Tax Avoidance Schemes (DOTAS) and the new General Anti-Abuse Rule (GAAR) provisions introduced in the s.206-215 schedule 43 FA 2013.

4 RAISING THE STAKES ON TAX AVOIDANCE; AAT’S RESPONSE TO THE CONSULTATION QUESTIONS

Q1 - Do you think that the objective criteria in Approach One are, on their own, sufficient to identify high-risk promoters or do you agree that the second approach would be more effective?

4.1 We agree that, whilst not exhaustive, the objective criteria provide clear indications as to the hallmarks that could be employed to identify high risk promoters. As the condoc recognises (paragraph 3.14, page 12), the criteria may miss their target through flagging up as high risk an otherwise compliant promoter, or vice versa overlook actual high- risk promoters who have not come to the notice of HMRC.

4.2 We note in paragraph 3.16 (condoc) that the Government does not intend to adopt Approach One based on the first option’s lack of flexibility.

4.3 AAT accepts that of the two approaches set out in the condoc the second option, which builds on option one, is more likely to be effective as the indicators listed in paragraph 3.17 (condoc) are more flexible and yet still consistent with the hallmarks of high risk anti- avoidance.

2 Part 7A ITEPA 2003, Schedule 2 FA 2011 Q2 - Do you consider that the suggested objective criteria would provide effective reassurance for advisers who are not high-risk promoters?

4.4 We believe that the objective criteria would certainly help all concerned to evaluate whether their scheme was likely to be deemed as being high risk.

4.5 However, AAT is concerned that there is risk that the “objective criteria” set out in Approach One, probably by necessity, are made more subjective through the regular deployment of the word “appears” in the six bullet point factors listed as part of Approach Two (3.17, condoc).

4.6 Taking into account our comment above (4.5) and after considering comparable HMRC practice, such as that employed in the publishing details of deliberate tax defaulters, we do not believe that public designation (3.32 and 3.33, condoc) should take place until an appropriate and robust appeals process has been exhausted, or concluded by contract settlement.

4.7 Paragraph 3.32 (condoc) suggests that HMRC will decide whether to publicly designate a promoter as high risk without Tribunal approval and before appeal. As we have already observed at 4.6 AAT considers that designation should only be publicised after the conclusion of an appeals process.

Q3 - In relation to the objective criterion based on disciplinary proceedings, do you think it is necessary to narrow the criterion to specific disciplinary matters?

4.8 We believe that the use of the word “relevant fine or disciplinary action” (3.13, bullet point 6, condoc) is cast too wide and, as a consequence, runs the risk of an overly wide interpretation in the future.

4.9 There are a number of matters which a professional body may take disciplinary action over which would not demonstrate that a tax agent would fall into the category of a high risk promoter, for example, non renewal of a practising licence, or non compliance with CPD requirements. This may inadvertently result in the pool of high risk promoters identified being diluted.

4.10 To address our concern set out in 4.8 and 4.9 we suggest that the words “relevant fine or disciplinary action” should be indexed directly to ethical requirements around professional competence and due care, and professional behaviour (which encapsulates compliance with law and regulation). When coupled with misconduct found in respect of matters relating to taxation, this should ensure the use of this criterion supports the aims of the approach, and minimise the risk of the net being cast too wide, and high risk promoters therefore going under the radar.

Q4 - Are there any other objective criteria you would suggest?

4.11 We believe that there is scope for an “objective criteria” that gives consideration as to whether the promoter has either in the past been publicly found guilty of tax offences, whether by court or otherwise named under the deliberate tax defaulter criteria.

Q5 - Are there any other factors you would suggest for the second approach?

4.12 AAT suggests that consideration should be given to situations where either third parties or users of the promoters’ products have complained and, or, that there is evidence of mis-description or mis- selling as outlined in paragraphs 3.6 and 7.2 (condoc).

Q6 - Are there any other circumstances where you think it would be appropriate for an immediate high-risk designation?

4.13 Involvement as a designer or promoter of existing failed avoidance schemes or ones that have been ruled against by the GAAR Advisory Panel should be an appropriate indicator for immediate high-risk designation, subject to the right of appeal (4.6). See also our response to Q7.

Q7 - Should a high-risk designation apply from the date of designation or the date that any appeal against the designation is dismissed?

4.14 It has always been an equitable part of the UK tax tradition to provide for an appeal procedure before public designation. As previously observed (4.6) we feel that the right of appeal prior to any public designation is a fundamental entitlement that should be accorded to scheme promoters. 4.15 Building into any legislation an automatic right of appeal prior to public designation would greatly reduce the risk of damage to a promoter’s profile. This would be particularly the case where, on appeal, it is established that they have been wrongly the subject of an act of public designation in a way that any withdrawal of designation after appeal could not possibly address.

Q8 - Do you think that these safeguards are sufficient to ensure that only promoters that are genuinely high-risk will be designated as such?

4.16 Please refer to our answer to Q7 above where our concerns in respect of safeguards have already been set out.

Q9 - Do you have any suggestions to improve the process?

4.17 As commented in 4.6, 4.14, 4.15 and in our response to Q7, we believe that a promoter should have an automatic right to appeal before public designation.

Q10 - Do you think it is reasonable to include in the objective criteria or factors for designating a promoter high-risk the fact that an entity is a successor entity or associated entity of an existing high-risk promoter?

4.18 Please refer to our response to Q11.

Q11 - Do you think that whether or not an entity is a successor or associated entity could be established through key individuals?

4.19 Based on our understanding of the marketing of abusive tax avoidance schemes, experience has shown us that promoters operating through a company regularly disband after being found to have mis-sold. Taking this factor into account the tracking of key individuals (3.40 to 3.45, condoc) would assist HMRC achieve their stated objectives in the condoc.

Q12 - Do you think that the proposed information powers will be both appropriate and sufficient to provide HMRC with the information necessary to understand the promoter’s products and trace its intermediaries and users?

4.20 AAT supports the proposals at paragraph 4.7 (condoc) that “the high- risk promoter should make product and intermediary disclosure” (as described).

4.21 We believe that the promoters’ compliance can best be achieved through a general information power incorporated into existing DOTAS legislation, rather than through the introduction of specific stand-alone information powers as proposed (4.4, condoc).

4.22 We are also of the opinion that extensive powers introduced by Sch 36, FA 2008 already enable HMRC to require information in response to a specific request.

Q13 - Are there any other information powers that it would be useful to apply to high-risk promoters?

4.23 s.223 FA 2013 has already recently extended HMRC powers to obtain information from promoters. AAT considers DOTAS requirements could be further expanded see also 4.21.

Q14 - Do you agree that naming high-risk promoters will serve to put their intermediaries, users and the public on notice of their high-risk status and the consequences?

4.24 As implied in our overview (section 3) we support HMRC’s objective to offer some measure of protection to the public. As a consequence we support the proposal of publicising high-risk promoters with the proviso that they (the promoter) have an automatic right of appeal ahead of any naming action.

4.25 Whilst AAT is supportive of the measure covered in this question we do not believe that it will be a cure all. By which we mean that it will be one more weapon for HMRC to deploy in their fight against abusive-avoidance and as such it will help to further dissuade potential new scheme users. It is unlikely, however, that the taxpayer on the proverbial Clapham Omnibus will be aware of the existence of the naming and shaming exercise. It is more likely that they will be too busy to concern themselves over such matters and that as result they will be reliant on their advisers to inform them over what is right and proper. Q15 - What safeguards should be provided?

4.26 Please refer to our response to Q7and Q14.

Q16 - Are there any issues with the proposed obligations on the intermediary?

4.27 We do not have any further observations to make that have not already been covered in our response to Q12.

Q17 - Are there any further obligations that should be imposed on an intermediary acting for a high-risk promoter?

4.28 The intermediary should be obliged to refrain from similar mis- description and mis-selling.

Q18 - Should there be any further safeguards provided for an intermediary acting for a high-risk promoter?

4.29 If the intermediary is to be the subject of public designation they should have an automatic entitlement to the same due process as outlined in our response to Q7 and Q14.

Q19 - Do you agree that the user of a product marketed or implemented by a high-risk promoter should be required to declare to HMRC that they have done so?

4.30 We agree and would like to clarify that it is currently a requirement in the Tax Return to declare the reference details of a tax avoidance scheme. The additions to DOTAS contained in s.223 FA 2013 require the reverse information from the promoter, to identify users who are subject to UK tax.

4.31 It should be noted that we would like to qualify our above endorsement with the following observation. Whilst it should be a prerequisite that an end-user disclose their involvement in a scheme, in practice this suggestion might be impractical when taking into account those taxpayers with sophisticated tax affairs who rely totally on their adviser to ensure that adequate disclosures are made. In such cases the taxpayer should not be the subject of any penalty for their compliance failure.

Q20 - Do you think it is reasonable that users of products marketed or implemented by high-risk promoters should be subject to extended time limits for assessing?

4.32 AAT considers that current requirements should continue to apply to users, which is that under s.36 of the Taxes Management Act 1970 (TMA) HMRC can make an assessment on a person where there has been careless or deliberate conduct.

Q21 - Is this proposal to create a specific rule that will allow intermediaries and users to disclose information to HMRC reasonable?

4.33 Taking into account that the purpose of paras 4.24 to 4.26 (condoc) is to protect an intermediary, or end-user, from being sued after supplying information, which is subject to a confidentiality agreement, to HMRC when required by law under a legal notice, for example sch 36, FA 2008. We consider additional legislation to be unnecessary other than for the sake of reassurance to the intermediary or end-user, due to the fact that this is already covered in law.

Q22 - What would this legislation need to achieve to be effective? Do you think it will achieve its aim of improving transparency and encouraging users to provide information to HMRC?

4.34 In support of the observations that we have already made in our response to Q21, to improve transparency and encourage the provision of information to HMRC, it would need to achieve reassurance for both the intermediary and the end-user that they would have protection for any action taken by the scheme provider arising out of disclosures made.

Q23 - Is this level of penalties appropriate for high-risk promoters?

4.35 Whist a maximum penalty of £1 million may be appropriate for promoters involved in multi-million pound abusive-avoidance activity it is hardly a realistic proposal for all involved in the design and marketing of aggressive avoidance schemes. 4.36 Taking into account our observations in 4.35 we believe that more detailed consideration needs to be given to establishing a scale of penalties that will achieve the Government’s deterrence objective.

Q24 - Do you have any other suggestions on the level of penalty appropriate for high-risk promoters?

4.37 Whilst we do not have any immediate suggestions AAT would be prepared to engage with HMRC either on a one-to-one basis or as part of a working party to assist in the design of penalties to act as an appropriate deterrent.

Q25 - Do you foresee any issues with imposing the higher standard for reasonable excuse and reasonable care?

4.38 The law defines ‘careless’ as a failure to take reasonable care. Failure to take reasonable care can be likened to the longstanding concept in general law of “negligence” as in the 1856 case of Blyth v Birmingham Waterworks Co…. (CH81140). Similarly, “A reasonable excuse is normally an unexpected or unusual event, either unforeseeable or beyond the customer’s control, which prevents him from complying with an obligation when he would otherwise have done” (SAM10090). Both terms have their ordinary English language usage which is well established, understood and supported by historic case law. Contrary to our understanding of what has been set out in the condoc, the concepts of reasonable care and reasonable excuse are objective standards, measured against the standards of the notional reasonable man. The knowledge of the individual is irrelevant. ‘Carelessness’ is an extremely flexible concept which can be applied to any particular circumstances by asking, ‘what would the reasonably careful person do in such circumstances. Therefore, the AAT does not consider the need to introduce a higher standard.

4.39 In itself, the imposition of a “higher standard” could introduce an unhelpful complication. Having said that, common law does cater for a higher standard based upon the concept of reasonableness. This is not a different application of reasonable care or reasonable excuse. They are terms of art and have a particular meaning. The distinction is between ‘what standard is expected of an ordinary reasonable man’ and ‘what standard is expected of a person professing to have a special skill’. If high risk promoters are regarded as persons of a special skill, they will be judged according to a higher standard of the reasonable person exercising and professing to have that special skill. For example, a doctor must act as a reasonable doctor in his profession and not as an ordinary reasonable man.

4.40 Paragraph 4.38 (condoc) states that “The proposal is that no advice will be admissible as part of a defence…” This proposal with the “higher standards” would serve to deny the Tribunals and Courts access to the full facts that should be at their disposal to assist them in determining whether or not ‘reasonable excuse’ or ‘reasonable care’ has been exercised. The objective standards of reasonable excuse and reasonable care are extremely flexible and capable of being used to determine whether an individual had provided an appropriate level of information to an advisor, and whether the individual acted appropriately in light of advice. We, therefore, firmly believe that advice should be admissible as part of a defence and then measured against the said objective standards.

4.41 On the basis of our comments in 4.38 to 4.40 AAT does not support the imposition of a higher standard. In summary, reasonable care and reasonable excuse are terms of art and, in essence, they are what they are. A consequence of this fact is that we do not support a higher standard. We believe that the reasonable excuse and reasonable care concepts are sufficiently flexible to apply to such circumstances, i.e., would the reasonable man have so relied upon the particular advice in the particular circumstances? We are concerned that the condoc seems to be seeking to place the onus on the wrong party. In our view, the obligation to show that the particular criteria have been met should rest upon the advisor and not on the user, who does not have, and cannot be expected to have, the requisite knowledge.

Q26 - Is it reasonable to extend the higher standard to other circumstances for high-risk promoters?

4.42 AAT considers that established standards should remain as at present for the reasons outlined above (4.38 - 4.41). We also consider that it should be for HMRC to establish the evidence and build a robust case in all circumstances rather than seek to redefine existing standards and thereby dilute the rights of others.

Q27 - Should there be a statutory limit for the period that HMRC allows for taxpayers to amend their returns?

4.43 A time limit already exists for taxpayers to amend their returns, which is 12 months after the filing date.

4.44 Whilst currently each person’s tax affairs are treated individually and AAT has concerns in respect to changes to this basic principle, we can see some merit in the option for the ‘batching’ of cases in the manner outlined in paragraph 5.7 (condoc) for HMRC, but we are not in support of the proposed change.

4.45 The basis of our opposition is that there may be differences in a person’s affairs which mark a distinction from the test case. When the differences have been clarified HMRC should close the enquiry under s.28A TMA. This will bring the tax into charge unless the taxpayer appeals to the Tribunal, which will be costly to him to technically defend. Therefore, there is no need for a new statutory limit for the period that HMRC allows for taxpayers to amend their returns as existing legislation enables HMRC to bring the tax into charge.

Q28 – Alternatively should there be a statutory minimum period which could be extended at HMRC’s discretion?

4.46 AAT would be against this proposal on the basis that we do not see that the granting of an extension should be left to the discretion of HMRC.

Q29 - Should HMRC be able to impose this requirement if they win a case at any point at a tribunal or court where the taxpayer does not appeal further, or is there a minimum level in the court hierarchy that should be reached before the requirement can be imposed?

4.47 AAT is of the view that legislation of this type is not appropriate and is contrary to UK taxation traditions.

Q30 - Would defining a scheme as “any scheme or arrangement for which it would be reasonable to conclude that the obtaining of a tax advantage was the sole or main purpose” capture the tax avoidance schemes that this measure is intended to catch?

4.48 We view the above question to be an extension to Q27 and Q28 and for reasons outlined at the time of responding to those two questions AAT does not consider this proposal should apply to ordinary users.

Q31 - Are there any other suitable criteria that could be applied? 4.49 We refer you to our response to Q7 where we have stated that legislation exists which could be applied on an individual basis.

Q30 - Would defining a scheme as “any scheme or arrangement for which it would be reasonable to conclude that the obtaining of a tax advantage was the sole or main purpose” capture the tax avoidance schemes that this measure is intended to catch?

4.50 We are of the opinion that such wording would work. In fact there are existing cases of identified schemes that have successfully closed using anti-avoidance legislation with wording similar to Q30.

Q31 - Are there any other suitable criteria that could be applied?

4.51 AAT does not have any further suggestions to make.

Q32 - Do you agree that once notified that the avoidance scheme they have used has been proven to fail in litigation, other users of the scheme should be required to amend their self-assessments to negate the tax advantage they had gained?

4.52 Please refer to our response to Q27.

Q33 - Are there other ways to bring the tax to account without offering scheme users further opportunities to delay settlement?

4.53 We believe that the solution to Q33 is to avoid making the tax code even more complex through the enactment of further legislation but to, instead, make use of existing legislation.

4.54 Payment of tax is currently usually postponed under s.55 TMA (s.55) ss.55(4) of that act already enables HMRC to apply for immediate payment of the tax following “a change in circumstances of the case”. Settlement of a test case is such a change in circumstance and HMRC should use current legislation.

4.55 Furthermore, 5.18 (condoc) suggests that “taxpayers who do not believe that the judgment in the ‘representative’ case is relevant to their circumstances will be required to advise HMRC of their position and why they hold that view.” This currently happens in cases where taxpayers are using this type of avoidance scheme. Use of s.55 would put an onus onto a taxpayer to support their position with minimum effort on HMRC’s part.

Q34 - Do you agree that a penalty should work in this way to encourage taxpayers to comply with these obligations?

4.56 Whilst we accept this condoc’s proposal should encourage taxpayers to comply with the obligations set out in the condoc we refer back to our comments made in para 4.31.

Q35 - Do you have any further comments on how this new requirement and penalty should work in detail?

4.57 We do not have any additional comments to make; please see our responses to Q27 and Q33.

Q36 - Are there any other penalty models or structures which you believe would work more effectively?

4.58 We do not have additional comments to make; please refer to our responses to Q27 and Q33.

Q37 - Do you think it is reasonable for the prescribed information to include all material provided to prospective users of an arrangement, sample copies of all documents signed by users, a full analysis of the tax advantage that the arrangement is designed to obtain and an explanation of how the arrangement produces the tax advantage?

4.59 AAT supports this proposal. Please refer to our earlier comments found under Q12 and Q13. Q38 - Alternatively do you think that such material should only be provided following a specific request from HMRC?

4.60 AAT is of the opinion that DOTAS rules should provide for automatic provision of such material; see also our response to Q13.

Q39 - Do you think that the high-risk promoter and follower penalty proposals will have a wider impact on individuals and households than that already identified?

4.61 Taking into account that the figures set out in table 2.1 (condoc) have been certified by the Office for Budget Responsibility, the AAT does not wish to make further comment under this section.

Q40 - Do you have any comments on the assessment of the equality impacts for either proposal?

4.62 We do not have any basis from which to disagree with the comments entered into the grid under “equality impacts”.

Q41 - The high-risk promoter proposals will only impact a small number of promoters some of which may change their behaviours to avoid being designated high-risk. The impact of the proposals on promoters designated high-risk will vary depending on the type of information power and level of penalties to which the promoter is subject. What do you think will be the cost to the high-risk promoter of the following?

a) Providing information under the specific information power

b) Providing information under the general information power

c) Informing intermediaries and users of their high-risk designation.

4.63 Taking into account the fact that the AAT is a representative body whose members are primarily operational we do not have access to sufficient data to enable us to respond to points a, b and c.

5 CONCLUSIONS 5.1 In the General Overview (section 3, above) AAT:  expressed support for the Government’s commitment to robustly tackle tax avoidance  shared and recognised HMRC’s concerns as set out in paragraph 3.6 and 7.1 to 7.7 of the condoc concerning mis- description and mis-selling.

5.2 In the “Summary of Impact” on page 34 (condoc) it states that,” HMRC estimates that there are approximately 20 businesses that are potentially high-risk promoters.” Our response to the consultation questions has taken into account the small number of businesses targeted by these proposals, in order to assist HMRC in tackling the behaviour of high-risk promoters in a proportionate way and to make greater use of existing legislation, whilst retaining the safeguards necessary for efficient tax administration.

If you have any questions or would like to consult further on this issue then please contact the AAT at: email: [email protected] telephone: 020 7397 3088

FAO. Aleem Islan Association of Accounting Technicians 140 Aldersgate Street London EC1A 4HY