Hector in penalty crossfire

‘If you ran someone over at the traffic lights you could get fined less,’ says a gloomy Richard Murphy, partner in the three-partner practice Murphy Deeks Nolan.

As the day when almost nine million ordinary Brits suddenly become responsible for administering their own tax affairs draws ever closer, fears are growing that tax advisers may get caught in the adversarial crossfire between clients and the Inland Revenue.

Self-assessment is going to shake the profession to its core, and at a time when competition from the high street banks and building societies on basic financial services is burgeoning. Not only will it cut a big slice out of tax return work but there will inevitably be dramatic change to the whole client/accountant relationship.

Recent Revenue concessions have been warmly welcomed by the profession – most recently the new return for self-assessment which meets many of their demands. And another concession came after prolonged resistance, on the distribution of taxpayer statements to both clients and advisers.

It was one of the profession’s key demands for self-assessment and the decision is one of a series of steps which has brought some relief to a wary market.

More concessions

But advisers still look to the Revenue to go further. Many particularly want concessions in the way it uses its veritable arsenal of penalties, surcharges and interest demands in the early years of self-assessment.

Yet there are no signs of relaxation. Indeed, Revenue self-assessment director Doug Smith emphatically ruled out a climbdown in a recent radio interview and has consistently denied predictions of a last minute about-turn to achieve popular support.

Even so, firms with large numbers of tax clients believe some sort of concession will be inevitable though David Frost, president of the Chartered Institute of Taxation, believes this could be wishful thinking. ‘The adversarial principle is almost enshrined in the self-assessment system,’ Frost says.

‘We are pressing the Revenue to apply a light touch when dealing with taxpayers and their advisers during the first few years of the new system.

Indeed, we believe that if the system is to work properly, it is essential that the Revenue should be both gentle and sensitive. We realise, however, that we are asking a lot of a system which will become more reliant on computers.’

Murphy too has forbodings and speaks for many when he says that the upper echelons of the Revenue appear out-of-touch with the tax inspectors he deals with. ‘I don’t care what the people at the top of the Revenue say, because the ‘light touch’ they say they’ll apply to penalties under self-assessment means nothing to the average tax inspector. They have the right to levy substantial fines.’

‘If the Revenue decided not to impose penalties in year one, they would have to do so in year two. The taxpayer will blame their adviser so we will have to look to the institutes to lobby furiously on our behalf.

The direst vision of the future predicts that the long-established principle that taxpayers are innocent until proven guilt will be ditched as Revenue inspectors launch wide-ranging and aggressive audits of taxpayer records.

Taxpayers, not necessarily told why the audit is happening, are likely to blame their advisers.

As Frost says: ‘Clients of professional tax advisers selected for audit will often not understand why they have been picked out. Has their adviser let them down, for instance? And if a tax inspector has a specific area of a tax return where he wants further information, will he raise every other conceivable question at the same time? We have already heard rumours that this may be likely and, if true, it will contribute to the risk of adversarial stances.’

The Revenue is doing its best to downplay the profession’s doomsday predictions.

However, experience from other countries which already have a system of self-assessment suggests that while the large teams of compliance officers the Revenue authorities deploy will initially target the black economy, they invariably end up going after a softer target.

Gerry Hart, managing director of the Tax Team, a franchised adviser network, says this was particularly the case in Ireland. He explains: ‘Self-assessment in Ireland was sold on the basis that the tax system was collapsing. Clearly, this is not happening in the UK. But

tackling the black economy is not unpopular – everyone can see the merit in that. So what happened? Instead of going after the evaders, they just went for the easy target and now spend their time screwing a few more pounds out of people who already send in returns but have omitted something by accident. There is a real fear this could happen in the UK.’

Climate of fear

Creating a climate of fear helps no one and threatens to turn tax into a quasi-US law enforcement system designed to catch the modern-day equivalent of Al Capone. ‘What is needed is a penalty system that looks at taxpayer intent – if they are deliberately evading tax, they should be fined,’ says Murphy. ‘I have no problem with severe penalties for defrauders.’

But the current penalties regime could have consequences for taxpayers beyond the financial. Some advisers suggest they might get rid of troublesome clients, the persistent late-payers for example, because of the administrative hassle of chasing after them. Bruce Lawson, director of Worcester-based accountancy firm Self-Assessment Ltd, says not even the best-organised firms can escape them.

‘This is nothing new and a few laggards are not a problem. Some clients throw away anything that comes in in a brown envelope,’ says a pragmatic Lawson. ‘I believe most well-organised firms will have 20 to 25% of customers in default under self-assessment. We have around 5% under the existing system and do badger them to hurry up, but some clients don’t give a fig.There has to be some back-protecting by accountants.’

Ruthless accountants

Lawson is telling clients they have to think about tax in a different way. Furthermore, the practice plans to write to all their late-returners on 31 January next year telling them that if they were this late under self-assessment, they’d now have been fined z100. And he’s prepared to be ruthless: ‘We’ll just have to say we can’t do the work in future unless they cooperate.’

But is ditching clients really the answer? As always, make a mistake in clients’ affairs and advisers could be disciplined by their professional body – nothing under self-assessment changes that – but private client specialist Adam Broke says accountants are unlikely to be penalised for having late-payers.

Nevertheless, he does agree accountants will have to be much tougher.

‘If something is wrong and has to be adjusted, there may be a penalty.

The taxpayer will have to get used to that. It depends who is responsible for producing the mistake. No one likes paying interest but it is a no-fault thing. Surcharges are a different matter,’ he believes.

‘The whole system will be more adversarial. It is not a question of cooperation.

The Revenue is trying extremely hard and has made some important concessions.

There is a chance that the profession will get stuck in the middle, but we’re used to it. It’s our job, after all,’ Broke adds.

They may be used to it but it isn’t much fun waiting for the axe of redoubled conflict to fall – as it’s bound to even if only a fraction of taxpayers are convinced by the reassuring messages beaming out from the Revenue’s cartoon advertising star. IoT president David Frost accuses the campaign of being misleading: ‘The truth is that our television hero is simply the front man for a system which could turn out to be very tough. Judging by the experience of other countries which have introduced self-assessment, it is likely relations between taxpayers and the Revenue will become strained and adversarial. That is sad but true.’

The Revenue’s power to conduct surprise audits of taxpayers under self-assessment is also raising heckles. No one doubts the need for random enquiries but it is a system that lends itself to abuse. The Revenue claims that the new system is a massive plus because it will reduce the level of confrontation with taxpayers but it could just as easily have exactly the opposite effect. And clients are hardly likely to accept inspections lying down.

Stephen Fox, associate in charge of tax investigations at Robson Taylor in Bath, predicts a surge of complaints from taxpayers subjected to the unwelcome attentions of the Revenue. His fear too is that accountants will find themselves piggy in the middle. ‘The gloves are off now and the Revenue doesn’t even need a pretext for looking,’ says Fox. ‘There will be an increasing take up of enquiries into taxpayers affairs and much more activity in this area altogether.’

But there is still a curious unwillingness, or inability, to take clients in hand. Fox will do what he can to knock the troublesome ones into shape but this won’t mean more than tightening up on letters of engagement, placing more emphasis on deadlines, and warning clients that if they don’t get the information in on time the practice can’t guarantee to lodge the return on time.

Fox dismissed suggestions that firms might actively dump their ‘worst case’ clients. Many, he believes, would probably go elsewhere if they couldn’t get their act together. ‘We won’t ask any clients to leave, because you have to take the rough with the smooth. But costs would be burdensome if we were constantly having to chase them for information and to meet deadlines. Not only would our fees mount up but the Revenue’s own penalties meter would be running. I think they’d probably terminate the relationship themselves anyway.’

Bucket shop advice

Fears of a massive invasion by bucket shop tax advice centres into high streets across the country have receded somewhat. The market just isn’t there for new entrants such as US giant H&R Block which has a lion’s share of the US tax return market. There’s no doubt, though, that tax advisers do face a major threat at the bottom end of their market from the banks and building societies which are all looking at tax advice as a service they could usefully provide. Fox at Robson Taylor dismisses the threat as peripheral. ‘Tax return work will undoubtedly become less profitable.

It is difficult to build the checks and balances into the work for the fees that some people are prepared to pay. Bucket shops are fine for some types of client but it is not our market. We would look to sell clients a wider range of services. We have a lot more irons in the fire than just a basic form filling service.’

Nevertheless, The Tax Team franchise has grown to ten outlets over the last 18 months which Hart claims is a sure sign of new demand for tax advice services. Still relatively small, the tax services market is growing now but the one thing it isn’t going to do is provide a fee bonanza for big firms.

The very low-level returns are always going to feed the bucket shop operator but advisers, like Murphy, say that won’t impact accountants. ‘If they see bucket shops as a threat, then they are not providing a value-added service. All they are doing is form filling. Our market is further up the scale than this.’

The Government is risking a public relations disaster if the proportion of taxpayers who failed to return their forms on time in the Leicester self-assessment trial carries through when the systems go live nationally.

It could mean as many as two million people being fined or surcharged – and whichever party is in power at the time is going to get the blame for it.

But is self-assessment a political issue? It should be. The first tax returns could hit people’s doormats on the day of the election. Winding up nearly nine million taxpayers with this form and then going to the country is not a recipe for political success.

‘Who is going to believe a politician telling them they are the party of lower taxes when this sort of system is being put in place?’ asks Murphy.

‘There will be a taxpayer backlash.’