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HMRC powers come under scrutiny

A JUDICIAL REVIEW ruling last week effectively gave the green light to the taxman to play judge, jury and executioner when deciding whether to remove a firm’s tax agent status.

HMRC has been investigating possible fraud at Christopher Lunn & Co (CLAC) accountants and last November said it was refusing to deal with the firm concerning its clients’ tax affairs.

This is the first case in which HMRC took this decision before the firm in question had been convicted of wrongdoing. Mr Justice Kenneth Parker found against the taxman, but the reasons given were strictly procedural – not giving CLAC the chance to make a defence against the decision.

But, by the time a flawed ruling is rectified (by process on this occasion) it might be too late. A firm could have already lost all its clients. Investing all this power in the taxman may not be particularly desirable.

On the one hand, the taxman does have a duty to the Exchequer, as Richard Mannion, national tax director at Smith & Williamson, pointed out: “If HMRC was certain there were misdeeds going on, me and other taxpayers are having to pay for that.”

graph-hmrc-powers-next-roundsCLAC’s actions constituted a “serious attack” on the Treasury, HMRC told the judicial review, and the alleged fraud was estimated to be worth around £117m.
If HMRC has these concerns, it must have some recourse to stop the firm putting its clients at risk.

But even if a firm is innocent, the damage of refusing to deal with them is extreme. Mike Warburton, tax partner at Grant Thornton, said: “Something like this is likely to destroy a business.”

Reports have claimed that already 700 clients out of 7,000 and ten staff have left CLAC since HMRC first raided the offices in June 2010.

Lunn himself told Accountancy Age that the firm is still attracting clients. But his company has had to deal with the associated problems of a criminal investigation, such as HMRC holding on to client files since the raid.

The taxman’s only dealing with the outside body in this process was obtaining a search warrant from court – and the evidence that it presented has still not been explained to CLAC, a point that is subject of a second judicial review (see box below). At no point was CLAC able to defend its actions without harming a potential criminal trial.

The decision to remove tax adviser status was taken by HMRC commissioners – who, to a degree, are independent from the investigators but “clearly different to
having a separate party doing it,” said James Roberts, partner at Barlow Lyde & Gilbert.

For a decision with such huge ramifications – for the Treasury and the clients losing out, or the firm going out of business – an independent arbiter might be essential.

Tax tribunals could take this role but there is a danger this would result in the same case being heard twice if it later goes to a criminal trial. Is this preferential to the current system?

Perhaps the problem with the current system is not HMRC’s newly discovered powers – the problem is that many advisers are regulated in the first instance.

As John Cassidy, a tax investigations partner at PKF, said: “Anybody can call themselves an accountant or a tax agent – and HMRC is forced to deal with them. That is equally wrong.”

A registration system, with hurdles to overcome before becom­ing a tax adviser,
might prevent less qualified advisers being put in charge of clients’ finances in the first place. Any actions that fall beneath a threshold of accepted practice, overseen by an outside body, would be punished.

graph-hmrc-powers-against-registration

This would not necessarily be divided on the current lines of “qualified” and “non-qualifieds” (see box above). But thresholds of some description would be
in place.

Roberts said this is possible; the Financial Services Authority has a similar system when it comes to disciplinary processes against authorised individuals.

There is “nothing in principle” to stop HMRC implementing a clearly defined structure of increasingly independent decision makers. Importantly, Roberts added: “When you become more formalised, the attention falls on who polices the rules.”

This might not be a universally popular idea. But the accountancy profession has a lot to gain from the policing of dubious practitioners through a well-defined criteria. This would ensure that the public’s personal account submissions have some form of authority.

At the same time, it would formalise HMRC powers and the taxman would enter disputes wearing only the prosecution hat. However, with such a polarised debate on this issue, a decision like this would leave far more than 12 angry men.


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