Keeping the accountants accountable

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

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  • John Drover

    Given the duty of all professionals to serve the public interest, how can the promotion of aggressive tax avoidance schemes be said to be consistent with that objective? Benefitting some at the expense of others is against the public interest as generally understood in the UK.

    In recent years, the accountancy profession has changed the definition of “public interest” to mean serving public-interest entities and their stakeholders. That change was made in an attempt to appease the US and as a precondition to fair value accounting being acceptable in the UK. Gone are the days of a public interest duty so as not to benefit any person or persons (including oneself) at the expense of the wider community. Gone too is the moral framework such a principle brought to capitalism and to wider society.

    A number of professions must take a long hard look at themselves and serve the public interest as originally intended by their constitutional documents not as contrived by their Executive boards.

  • DP

    Echoing the comment below I was expecting to read something about accountability to the public. Disappointing to instead read about accountability to high net-worth individuals.

  • Ian Sunderland

    To support the comments of John Drover below, the accountancy profession would do well to recall the words of Lord Wilberforce in British Steel Corporation v. Granada, namely:

    “There is a world of difference between what is interesting to the public and what it is in the public interest”.

    IFRS is interesting to sections of the public (especially short-term investors) but is contrary to economic stability in the wider public interest as Wilberforce would have understood the term. Likewise aggressive tax avoidance benefits some at the expense of others and is thus contrary to the public interest as generally understood.