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Analysis: PAC reignites tax ‘code of conduct’ debate

THE ROLE of tax professionals is under scrutiny again, following the Commons’ public accounts committee’s call for HMRC to introduce a new code of conduct for all tax advisers and HSBC’s renewed apology on Monday (23 February) that was prompted by allegations that the bank helped wealthy clients using Swiss bank accounts to evade tax.

A number of tax professionals have argued that a new code of conduct is unnecessary, but some experts have expressed support for a kitemark, or charter, for advisers.

On Wednesday, the Commons treasury committee will question HSBC group chairman Douglas Flint and HMRC officials about the HSBC allegations. Flint issued a fresh apology yesterday and said disclosures of “unacceptable historical practices and behaviour within the Swiss private bank” showed “how much there still is to do and how far society’s expectations have changed in terms of banks’ responsibilities”.

Danny Alexander’s call on Sunday for those who encourage or facilitate evasion to face the same financial penalties as evaders themselves is likely to be challenged by experts who consider that HMRC and other agencies already have wide-ranging powers to deter and counter evasion.

Large accountancy firms

The Public Accounts Committee (PAC) declared on 6 February that tax arrangements promoted by PwC in Luxembourg, revealed by several media organisations last November, “bear all the characteristics of a mass-marketed tax avoidance scheme”. PAC chairman Margaret Hodge noted that the committee had examined on two occasions the role of large accountancy firms in “advising multinational companies on complex strategies and contrived structures which are designed for no purpose other than to avoid tax”.

The arrangements promoted by PwC were “based on artificially diverting profits to Luxembourg through intra-company loans”, Hodge said. Kevin Nicholson, the firm’s UK head of tax, had denied the firm was engaged in promoting mass-marketed avoidance schemes. The firm was “working with clients around their individual needs and requirements”, he told Hodge in December.

Other leading accountancy firms were named in the so-called “LuxLeaks” papers. Deloitte, EY, and KPMG have all defended their work and pointed to their own codes of conduct. But Hodge claimed that “the fact that PwC’s promotion of these schemes is permitted by its own code of conduct” was “clear evidence that government needs to take a more active role in regulating the tax industry, as it evidently cannot be trusted to regulate itself”. PwC’s code did “little more than shroud the way PwC exploits flaws in international tax law to devise and offer aggressive tax avoidance schemes to its clients”.

These “flaws” are widely recognised and are a key feature of the G20/OECD base erosion and profit-shifting (BEPS) project. PwC said in its initial response to the PAC report that it stood by the evidence given the committee and supported reform of the tax system, which was “too complex, as governments compete for investment and tax revenues”.

Government regulation

Despite the calls for a tougher approach, some senior advisers point to key reasons why a code should be avoided.  

Chas Roy-Chowdhury, head of taxation at ACCA, told the Financial Times that government regulation of the tax profession was unnecessary because “no mainstream accountancy firm” was currently marketing avoidance schemes.

There was already a code of conduct jointly prepared by the professional institutes representing tax advisers. A separate code of practice on taxation for banks, drawn up by HMRC, applies to both a bank’s own tax planning and its promotion of tax planning arrangements to others.

Jane McCormick, senior tax partner at KPMG in the UK, notes that lawyers are subject to regulation by the Solicitors Regulation Authority, while tax and audit professionals are regulated and governed by their institutes.

Professional code of conduct

Could HMRC take responsibility for setting acceptable professional standards? Ray McCann, chairman of the CIoT’s professional standards committee, believes HMRC would not want such a role, which would raise concerns over the department becoming “increasingly able to be the judge in its own cause”.

McCann says: “That is not to say that HMRC should be silent on standards, and where it has concerns it must be free to voice them and raise them with professional bodies where appropriate. HMRC can apply a range of sanctions against advisers in some situations.”

McCann’s colleague at law firm Pinsent Masons, tax director Tori Magill, points out that HMRC is an equal party to tax proceedings and it would be “wholly inappropriate for one party in proceedings to have a regulatory function over the other”.

She says: “If government seeks to regulate the profession, they should do so by legislation… Determining who should be subject to the proposed regulation, and who will be responsible for applying it is a logical starting point, but there appears to be no consensus of opinion amongst the profession, or the government, on these quite fundamental issues.”

HMRC has acknowledged that the professional code of conduct in relation to taxation (PCRT), prepared jointly by the CIOT and five other tax and accountancy bodies, is “an acceptable basis” for dealings with HMRC, and McCann estimates that the code applies to around 50,000 individuals.

CIOT members breaching the PCRT may be investigated by the Taxation Disciplinary Board which operates independently of the CIOT, according to its website. The board reported that it received 47 complaints, and a disciplinary tribunal imposed expulsion from the professional body in seven cases, in 2013.

Members “must never be knowingly involved in tax evasion”, although it is appropriate to act for someone regularising his or her tax affairs, the PCRT says. Tax planning is legal, and “taxpayers are entitled to plan their affairs within the law to minimise the amount of tax they are required to pay”.

Tax avoidance is less easy to define and involvement in it “could subject the client and the member to significantly greater compliance requirements, scrutiny or investigation as well as criticism from the media, government and other stakeholders”. The PCRT also points out that some tax avoidance may involve “elements of criminal behaviour”.

Members are advised to be aware of HMRC’s views on what amounts to tax avoidance, and the guidance reproduces HMRC’s list of typical characteristics of a tax avoidance scheme to be “wary of”. However, the PCRT states that the public debate “has not changed the member’s responsibility to his client”.

General anti-abuse rule

What tax planning is appropriate? The PCRT says this is ultimately a decision for the client to take “having received advice and taking into account broader commercial and ethical issues”. But a member “should not recommend” planning that he or she considers ineffective because of the new general anti-abuse rule (GAAR) or other tax law – which includes a host of targeted anti-avoidance rules. 

Many of the schemes highlighted in recent court decisions date from several years ago, and tax experts believe that taxpayers’ appetite for avoidance has been reduced by the purposive approach taken by the courts in interpreting tax legislation, the introduction of the GAAR, and the reputational risk associated with aggressive schemes.

“It is clients and the public at large that are the ultimate regulator, and there is no doubt that public concern over tax avoidance and tax evasion has reached a level of sensitivity that [tax professionals] cannot ignore,” says McCann. He also cites HMRC’s “agent strategy” and a new regime targeted at “high risk promoters” who fail to comply with the disclosure of tax avoidance schemes (DOTAS) regime. Two recent consultations concerned proposed measures to strengthen DOTAS and sanctions for tax avoidance.

A ‘trusted tax advisers’ charter

Last summer the PAC and top ten accountancy firm Mazars hosted a debate on the role of greater transparency in improving public understanding of tax issues and enhancing confidence in the system. Tim Davies, the firm’s UK head of tax, argued that “nowhere [in the existing codes of conduct] will you see a ‘thou shalt not'”.

Some support for Mazars’ idea of a “trusted tax adviser charter” (TTAC) was expressed during the debate by representatives of Legal & General and the trade union Association of Revenue and Customs. Legal & General’s group tax director, Grace Stevens, suggested that tax advisers could disclose more about their own tax risk appetite – what they would and would not do. But the Conservative MP and former tax adviser Nigel Mills said he was wary of “trusted” schemes that might exclude smaller firms that “don’t have the clout or can’t afford to pay the fees”. Tina Riches, national tax partner at Smith & Williamson, said a separate charter might “just cause confusion”.

McCann believes initiatives such as the TTAC or “kitemarks” would set standards that are “nowhere near the standard expected of a member of a professional body”. They would give the public “a sense of comfort that was not merited since in general they would inevitably need to be based upon less stringent requirements”. The solution was for the profession to continue to develop – and improve public awareness of – existing structures such as the PCRT.

But illustrative of the differing views in the profession, McCann’s law firm Pinsent Masons reiterated earlier this month support for the idea of some form of kitemark for advisers.

Independent standard

Mazars’ Davies argues that businesses, consumers and other key stakeholder groups would benefit from the confidence associated with an “independently awarded” standard. “Attitudes over the last few years have progressed; and hand-in-hand with that comes a much greater demand for transparency and the need for reassurance that guidance provided by tax advisers meets an agreed standard and, moreover, is responsible in the way it helps businesses align their approach to tax with the core ethics and values of the organisation and the expectations of wider society,” he said.

KPMG’s tax principles “clearly state what we will, and won’t do”, says McCormick. “In particular, we will interpret legislation in a purposive way in line with the courts. We will not advise clients to enter into transactions with the main purpose of securing a tax advantage clearly contrary to the intention of parliament in enacting the relevant legislation and we do not act as mere advocates of tax planning structures or arrangements. We shall only promote transactions or structures that have both substance and business purpose.”

Andrew Goodall is a freelance tax writer and journalist

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