TAX avoidance is always a hot topic, never more so than with the recent stream of famous individuals involved in the Liberty scheme. The fact that some of these 1,600 stars risk bankruptcy highlights just how serious these cases can be, and the financial and reputational value at stake.
The media focus is on the high net worth individuals themselves, and well-known personalities such as George Michael and Katie Melua have been chastised publicly for their involvement in the schemes (even where the money has long since been repaid).
Inevitably, the accountants who advised on these schemes may also find themselves under scrutiny as questions are raised as to why such schemes were recommended in the first place. So how do accountants advising on tax planning ensure they are not held accountable to aggrieved clients if the scheme fails to withstand HMRC’s tightening grip?
Plan from the start
Should accountants shut down their tax planning departments?
This is a serious question. The powers of the General Anti-Abuse Rule (GAAR) and HMRC’s toughening stance on tax avoidance mean that many insurers have shied away from providing professional indemnity insurance to accountants advising on tax avoidance schemes. Separate “tax accountants” questionnaires need to be completed. You will now be asked a multitude of detailed questions on the nature of the tax schemes you have advised on, as well as details of any HMRC investigations, claims or complaints.
If you answer these questions in the affirmative, you may find yourself without cover from the traditional A-rated insurers. However, if you deliberately fail to disclose your involvement in these schemes on your proposal form then you risk finding yourself without cover for a claim should one arise.
Scope out your retainer in an engagement letter
Regardless of whether you undertake tax work, you should make it clear what advice you are giving in your retainer letter.
The recent Mehjoo v Harben Barker case at the Court of Appeal shows just how important retainer letters are for scoping out an accountant’s duty. The claimant in this case successfully sued his accountant for £1.4m at first instance, arguing that he missed out on a clever tax avoidance scheme relating to his domicile status that would have saved him substantial capital gains tax. The Court of Appeal overturned the earlier decision, arguing that this accountant was not a tax specialist and was not negligent for failing to identify the tax saving. There is no such thing as a “general duty” on an accountant to advise and the retainer letter itself should make it clear what advice you will be giving.
If you do continue to advise your clients on how to mitigate tax, then take care to ensure your client is aware of the risks, and give this advice in writing. Even better, tell your client to keep some money aside/ accessible in the event that the recommended scheme does not work as intended. Hindsight will not judge you kindly so let the decision be on their head rather than yours.
Play it safe
Generally, if the tax advantage is achieved in a contrived or abnormal way, then it may well be considered abusive. Accountants and tax planners should play it safe and avoid any schemes that could be seen by HMRC as being too innovative.
In the long run, the only thing that you will gain from taking part in ingenious schemes that exploit tax law loopholes is an HMRC investigation; an upset client (and whatever reputational risk goes with that); and a professional negligence claim.
Virginia Hickley, partner at national law firm Mills & Reeve
Rosamond McDowell looks at key changes to inheritance tax policy, which apply from April this year
The average cost of fraud increased 35.4% to £3.9m in 2016, compared to 2015 data
Report argues that the government must change the way it makes tax and budget decisions
Partner at Pinsent Masons says Serious Fraud Office has secured 'one of the top ten enforcement actions of all time'