Navigating through the tax avoidance traps

TAX AVOIDANCE has become a hot topic of late, especially as a number of high-profile celebrities have recently been attacked for investing in avoidance schemes and HMRC has enjoyed success in challenging them. Notable examples include the refusal of tax relief to investors in the Eclipse 35 film investment partnership, and the Supreme Court’s decision to prevent the Tower MCashback partnership, and its investor members, from enjoying relief upon monies purportedly paid for software licensing rights.

Against this background, clients will inevitably be asking questions about the advice they have received, and seeking reassurance their arrangements cannot be challenged or unpicked by HMRC. Advice provided by professionals, in relation to tax planning strategies and schemes, will come under scrutiny. When clients raise questions and concerns, it is vital that tax professionals take care not to create problems for themselves, or make a difficult position worse.

Initial enquiries

Tax advisors may be asked by some clients to confirm the efficacy of tax planning advice they have been given, which could give rise to potential pitfalls. Tax professionals should avoid providing off-the-cuff advice about matters they have not reviewed for some time. Advice properly given some years ago may need to be reviewed or caveated in light of information now available. Further information about the client’s own circumstances, and the tax planning strategies in question, might need review. If tax professionals have any concerns that their previous advice no longer holds good, they must tread carefully.

Complaints and claims

Unfortunately, a client’s initial concerns may evolve into a formal complaint or claim. Tax professionals should be on guard. Nothing should be done inadvertently to prejudice the advisor’s position in the event of a claim arising in future. An all-too-common example is the creation by the advisor of documents which subsequently prove to be embarrassing, or unhelpful, when viewed in the context of a complaint or claim about the adequacy of advice given. With care, such problems can be avoided.

An attempt by the advisor to nip the client’s concerns in the bud by providing swift assurances, without carefully considering the subject matter of those concerns, may compound a problem. Such advice might inadvertently extend the time for bringing a claim, or result in additional losses being suffered by the client – for example, by incurring further interest charges on tax found to be due. As a first step, the advisor needs to bear in mind obligations to professional indemnity insurers. Many policies require professionals to report to insurers the existence or awareness of circumstances which may give rise to a claim – and it may be some time before a claim or formal complaint is actually made.

If a formal complaint or claim is received, the advisor should consider, in conjunction with insurers, seeking legal advice to ascertain how best to address it. It will be important to ensure all hard copy and electronic documentation relevant to the subject matter of the complaint is preserved without delay. Further, and very importantly, insurers and legal advisors can help create a privileged environment in which documents can be considered, and created, in such a way that they would not have to be produced in any subsequent litigation. This enables the advisor to take full stock of the position, and have confidence it has been properly addressed.

Upon considering a client’s complaint, with assistance from insurers and legal advisors as appropriate, the tax professional may be able to try to resolve it by providing additional advice. However, professional and regulatory obligations need to be borne in mind, and an important question will be whether the professional has the necessary objectivity to provide such advice.

Recent high-profile reports about the legitimacy of tax avoidance schemes, as well as the position of HMRC, will inevitably cause the advice of tax professionals to be questioned. If clients are no longer able to enjoy their desired tax reliefs, they may look to their professional advisors to shoulder the blame, or at least to justify their advice. Tax professionals should proceed carefully to ensure questions and concerns are dealt with in the best way possible, and that they do not inadvertently make a difficult situation into a dire one.

Jim Oulton is a partner, and Tim Shepherd a senior associate, in the professional liability team at Mayer Brown.