Taxman bares teeth to media tax advisers

HMRC's HUGE budget cuts might eventually leave it in a slender state but, like a street fighter, in losing weight it has learned to show its teeth. A criminal investigation into an East Sussex accountancy firm specialising in media clients is indicative of this new approach, city lawyers have said.

Christopher Lunn & Co, a media tax firm, has been the subject of a HMRC criminal investigation into its processes since 22 June 2010.

This investigation has been unique in two ways. First, on 30 November 2010, HMRC withdrew the ability of CLAC to submit tax returns on behalf of its clients without the courts having found the firm guilty of wrongdoing; secondly, and at the same time, the taxman contacted all its clients.

The company has launched a judicial review into the legality of the action to remove its tax agent status, which is currently being deliberated by Mr Justice Kenneth Parker - with a decision due imminently.

Christopher Lunn said that it did not have the chance to make representations to HMRC. The taxman countered that there was such concern around the clients' accounts that an immediate refusal to discuss clients' tax matters with the firm was essential.

A criminal trial, if it takes place, will happen some time this year. But whether or not anyone at the firm is tried or even found guilty of wrongdoing, this case does illustrate a new direction for HMRC - a "smarter" approach to using the powers in its capabilities.

Various finance acts, and the merger with Inland Revenue in 2005, have given HMRC more powers than ever, said John Cassidy, a partner at PKF.

The department is facing even greater budget cuts and has to work more effectively. "Instead of having lots of inspectors doing their own thing, it is asking 'what powers do we have? What tactics and strategies can we best use in this case?'," he added.

While the removal of tax agent status might be the more striking element to this case, the tactic of contacting clients is perhaps the more long-lasting damaging deterrent - "alienating" them from the firm, as Cassidy put it.

Whether there is anything in the allegations, it is hard for any firm to recover from the reputational impact of such actions. If the clients go elsewhere, "how do you put the genie back in the bottle?", said James Roberts, partner at Barlow Lyde and Gilbert. There are no protections for firms if regulators do take this approach.

Because of this, and the perceived necessity of this approach at a time of budget cuts, it is "destructive" for a business to get on the wrong side of any regulator, Roberts added.

"In nine times out of ten, the professional will do what they can to stop it escalating to a criminal investigation," Roberts said. "But it may well mean that the regulator manages to extract more concessions than may be due because they will deliberately be pressing on those buttons."