In spite of today’s levels of computerisation, it is nonetheless indisputable that tax advisers are human. I have doubts too, on some of them, but it is true, honestly. Human beings, even those employed by the Inland Revenue, make mistakes and errors of judgement, as the Revenue target levels and adjudicator reports confirm.
When I started specialising in taxation, short-term capital gains tax was just being introduced and tax advisers were having to come to grips with major changes in legislation on an annual basis. There appears to be no let-up in this trend. When we made a mistake in those days the worst that was likely to happen was a slightly acerbic letter from the Inland Revenue and in the most dire of cases, a disgruntled client who might take his tax affairs elsewhere.
These days the Revenue tends to assume that, although they make mistakes, any errors made by the taxpayer or his professional advisers are due to negligence for which penalties are eligible. If the mistake is made by the adviser, the client is likely not only to take his affairs elsewhere, but to slap in a writ for negligence and demand a few million pounds damages; which results in our insurers having nervous breakdowns and setting high professional indemnity insurance premiums.
The recent spate of criminal actions against tax advisers, in cases such as Hunt, Charlton and Chipping, all involved an overseas element and allegations that transactions were unreal or fraudulent and companies were controlled from the UK or concluded contracts in the UK when the tax planning required that this was done offshore.
No longer is the Revenue content with recovering tax, interest and penalties; they are prosecuting the tax advisers involved in setting up the structures in the first place. Obviously, I am not commenting on the facts in any particular cases, but the effect of mentioning the word ‘cheat’ to a Jersey tax adviser these days may result in terminal heart failure.
What is particularly disconcerting is that we have complex rules relating to highly technical areas such as company residence and transfer pricing and the law of contract, and the passing of title, is difficult and complex.
The tax precedents confirm the residence of a company is where its central management and control is carried on. It is perfectly possible to negotiate a contract, perhaps through a representative office, which is contractually concluded outside the UK.
These subtle distinctions are fully recognised by the tax law, and the civil law of contract, but the common law is a much more brutish arena where the niceties of the place of decisionmaking or the conclusion of the contracts are lost in the attempt to determine the alleged reality of where the company was run from, or where the contracts were made.
I accept that the Revenue has, quite properly, been given swingeing powers to obtain information relating to a taxpayer’s affairs, and overseas transactions, by their nature, may not naturally come to their attention.
The problem is to identify the adviser’s responsibility for implementing, or ensuring the correct implementation of their advice. The Revenue is entitled to those facts, fully disclosed, but the adviser needs to be reassured that if he acts honestly he will not face prosecution merely because the Revenue opposes his view.
The trouble with the criminal law is that a person is either guilty or not guilty. Much of our tax law, however, deals with shades of grey, rather than absolutes, much more suited to the civil law approach of balance of probabilities.
Recent events have shown that any tax adviser may be vulnerable to allegations of criminal conduct, and it may be time for us to try and establish, with the Revenue, where the tax advisers’ responsibilities begin and end, to try and determine with greater clarity when ‘tax planning’ amounts to ‘cheating’, and how to get complex technical tax concepts across to a lay jury.
The rewards from giving tax advice do not make the risk of criminal prosecution an acceptable consequence for making a mistake, or error of judgement.
Nigel Eastaway is chairman of the technical committee of the Chartered Institiute of Taxation and a partner in Moores Rowland.
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