This helpsheet provides further guidance on the application of the Fundamental Principles and Standards when providing tax advice.
Giving tax advice covers a variety of activities. It can involve advising a client on a choice afforded to him by legislation, for example, whether to establish a business as a sole trader, partnership or company. It could be advising on the tax implications of buying or selling an asset or business, or advising on succession planning.
For the most part clients are seeking advice on how to structure their affairs, either personal or commercial, in a way that is tax efficient and ensures that they comply with their legal and regulatory requirements. In undertaking any tax advice work members should always work within the Fundamental Principles and the Standards for tax planning. Transactions based on advice which is centred around non-tax objectives are less likely to attract scrutiny or criticism from stakeholders and are much more likely to withstand challenge by HMRC.
A member must never be knowingly involved in tax evasion, although, of course, it is appropriate to act for a client who is rectifying their affairs. See Tax evasion.
In contrast to tax evasion, tax planning is legal. Taxpayers are entitled to enter into transactions that reduce tax or to take interpretations of legislation that HMRC may not agree with. If HMRC wishes to challenge a particular transaction or interpretation, it may amend the return or issue an assessment accordingly. The client may then appeal against HMRC’s decision through the tax tribunal and courts if necessary with the associated costs and disruption.
Ultimately only the courts can determine whether a particular piece of tax planning is legally effective or not. However, a member should always advise the client that there may be wider reputational issues in such circumstances. Some tax strategies have been the subject of heated public debate, raising ethical challenges. Involvement in certain arrangements 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 and difficulties in obtaining professional indemnity insurance cover. Members should consider the potential negative impact of their actions on the public perception of the integrity of the tax profession more generally.
The definition of ‘avoidance’ is an evolving area that can depend on the tax legislation, the intention of Parliament, interpretations in case law, the view of HMRC and the varying perceptions of different stakeholders and is discussed further below.
Despite attempts by courts over the years to elucidate tax ‘avoidance’ and to distinguish this from acceptable tax planning or mitigation, there is no widely accepted definition.
Publicly, the term ‘avoidance’ is used in the context of a wide range of activities, be it multinational structuring or entering contrived tax-motivated schemes. The application of one word to a range of activities and behaviours oversimplifies the concept and has led to confusion.
In a 2012 paper on tax avoidance, the Oxford University Centre for Business Taxation states that transactions generally do not fall into clear categories of tax avoidance, mitigation or planning. Similarly, it is often not clear whether something is acceptable or unacceptable. Instead the paper concludes that there is ‘a continuum from transactions that would not be effective to save tax under the law as it stands at present to tax planning that would be accepted by revenue authorities and courts without question'.
If any challenge to arrangements is to be received it will most likely be from HMRC and therefore it is important to understand HMRC’s view of avoidance.
In March 2015 HMRC issued ‘Tackling tax evasion and avoidance’. In this document HMRC provides its view on the question of ‘What is tax avoidance?’
‘Tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It often involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter – but not the spirit – of the law.
Tax planning involves using tax reliefs for the purpose for which they were intended, for example, claiming tax relief on capital investment, or saving via ISAs or for retirement by making contributions to a pension scheme. However, tax reliefs can be used excessively or aggressively, by others than those intended to benefit from them or in ways that clearly go beyond the intention of Parliament.'
Part of HMRC’s website ‘Tax Avoidance – an introduction’ sets out, inter alia, what HMRC views as typical characteristics of a tax avoidance scheme that taxpayers and their advisers should be wary of. These characteristics have the following broad features:
- If it sounds too good to be true it probably is.
- Tax results out of proportion with commercial or economic risk or activity.
- Over complexity, artificial or contrived steps, or circular money flow.
- Offshore entities or tax haven countries are involved for no good reason.
- Secrecy or confidentiality agreements.
- The arrangement has a SRN assigned under the Disclosure of Tax Avoidance Scheme Rules (DOTAS).
It should be noted that the existence of one or more of these features does not necessarily mean the transaction is ‘tax avoidance’. Some of these features may exist in straightforward commercial transactions. For example, a transaction which has been allocated a SRN can be inoffensive but still be disclosable because it falls within a prescriptive area of the DOTAS regime such as leasing transactions, or transactions involving Stamp Duty Land Tax.
Whilst the aforementioned lists are not determinative or exhaustive in identifying planning that might be viewed as ‘avoidance’ they are nevertheless a useful sense check for members. Where one or more of these features are present this increases the risk of the advice provided. The member should consider carefully whether the planning in question is robust, whether it could be successfully challenged by HMRC, as well as the reputational risk for the member and the client in being involved in such a transaction. This is set out in more detail below (see the Primary adviser on a planning arrangement section and all those below it).
Some of these features set out in the paragraph above may also be indicative of money laundering, specifically designed to hide the proceeds of criminal activity, not just tax avoidance. See CCAB anti-money laundering guidance for further detail.
Members should refer to the Standards of tax planning. A member is required to act with professional competence and due care within the scope of their engagement letter.
A member should understand their client’s expectations around tax advice or tax planning, and ensure that engagement letters reflect the member’s role and responsibilities, including limitations in or amendments to that role. The importance of this has been highlighted by the Mehjoo case.
A member does not have to advise on or recommend tax planning which they do not consider to be appropriate or otherwise does not align with their own business principles and ethics. However, in this situation the member may need to ensure that the advice they do not wish to give is outside the scope of their engagement (see the paragraph above). If the member may owe a legal duty of care to the client to advise in this area, the member should ensure that they comply with this by, for example, advising the client that there are opportunities that the client could undertake, even though the member is unwilling to assist, and recommending that the client seeks alternative advice. Any such discussions should be well documented by the member.
Ultimately it is the client’s decision as to what planning is appropriate having received advice and taking into account their own broader commercial objectives and ethical stance. However, the member should ensure that the client is made aware of the risks and rewards of any planning, including that there may be adverse reputational consequences. It is advisable to ensure that the basis for recommended tax planning is clearly identified in documentation.
Occasionally a client may advise a member that they intend to proceed with a tax planning arrangement without taking full advice from them on the relevant issues or despite the advice the member has given. In such cases the member should warn the client of the potential risks of proceeding without full advice and ensure that the restriction in the scope of the member’s advice is recorded in writing.
Where a client wishes to pursue a claim for a tax advantage which the member feels has no sustainable basis the member should refer to the guidance on Dealing with irregularities.
If Counsel’s opinion is sought on the planning the member should consider including the question as to whether in Counsel’s view the GAAR could apply to the transaction.
It should be noted that any legal opinion provided, for example by Counsel, will be based on the assumptions stated in the instructions for the opinion and on execution of the arrangement exactly as stated. HMRC and the courts will not be constrained by these assumptions.
A member may be involved in tax planning arrangements in the following ways:
- Advising on a planning arrangement
- Introducing another adviser’s planning arrangement
- Providing a second opinion on a third party’s planning arrangement
- Compliance services in relation to a return which includes a planning arrangement
A member should always make a record of any advice given.
When a member advises on a planning arrangement the member should advise of the risks and implications as outlined below and should only recommend the planning for the client’s consideration based on a balanced view taking into account any potential risks.
The member should also carefully consider the POTAS regime and the risks, both reputational and financial, of advising on the arrangement.
Any tax advice on planning should consider all the risks and implications. These may include:
- The strength of the legal interpretation relied upon.
- The potential application of the GAAR.
- The risk of counteraction. This may occur before the planning is completed or potentially there may be retrospective counteraction at a later date.
- The risk of challenge by HMRC. Such challenge may relate to the legal interpretation relied upon, but may alternatively relate to the construction of the facts, including the implementation of the planning.
- The risk and inherent uncertainty of litigation.
- The probability of the planning being overturned by the courts if litigated and the potential ultimate downside should the client be unsuccessful.
- The issues involved in the implementation of the planning arrangement.
- The implications for the client, including the obligations of the client in relation to their tax return, if the planning requires disclosure under DOTAS and the potential for an accelerated payment notice or partner payment notice.
- The reputational risk to the client and the member of the planning in the public arena.
- The stress, cost and wider personal or business implications to the client in the event of a prolonged dispute with HMRC. This may involve unwelcomed publicity, costs, expenses and loss of management time over a significant period.
- If the client tenders for government contracts, the potential impact of the proposed tax planning on tendering for and retaining public sector contracts.
- Whether the arrangements are in line with any applicable code of conduct or ethical guidelines or stances.
- The interaction with other external codes of conduct, for example, the Banking Code, and fit and proper tests for charity trustees and pension administrators.
A member may advise on steps to manage elements of the risk if the client chooses to proceed. For example, the merits with client consent of a full disclosure of the arrangements to HMRC in advance of implementation even if not required by law.
Depending on whether it is within the scope of their engagement letter with the client the member may wish to suggest alternative arrangements.
A member may be invited to introduce their clients to an arrangement from another source. The member would often be paid a commission for making such introductions which must be disclosed and accounted for in line with the member’s professional body’s rules: ATT PRPG and CIOT PRPG.
Prior to considering the third party tax planning the member should ascertain whether the promoter is subject to a monitoring notice within the POTAS regime. The regime carries significant consequences for the monitored promoter, any introducer or intermediary of the monitored promoter and any client that uses a monitored promoter’s planning. If the third party is a monitored promoter within the POTAS regime it is difficult to envisage any circumstance in which it would be appropriate for the member to introduce their arrangement to clients.
Where there is no evidence that the promoter is a monitored promoter under the POTAS regime then the member should appraise the planning and form a view on its effectiveness and risk considering the points outlined in the ‘What is HMRC’s view’ section above (see the penultimate two paragraphs) to understand whether the member wishes to be associated with the planning both from a technical and a reputational perspective.
If a member does not have the expertise to assess the transaction and advise the client on the potential risks or if the other adviser does not release all the legal opinions and implementation details to allow the member to analyse the arrangement, the member should inform the client that they are not able to advise on the arrangement. Where appropriate the member should advise the client to consider very carefully the risks.
The member should also consider whether including the relevant tax advantage in a tax return would have a sustainable basis. If there is no sustainable basis the member should not recommend the planning.
A client may ask a member to advise on an arrangement offered to the client by another adviser. No commissions should be accepted where a member is providing tax advice on a third party’s arrangement as it would undermine the member’s objectivity. The member should consider carefully whether they are qualified to advise the client on the potential technical and reputational risks and rewards of the arrangement. If the member does not have the relevant experience, they should seek specialist support or recommend that the client obtains advice elsewhere.
The member may be able to advise on the practical issues involved in participation in a tax planning arrangement, whilst advising the client to take advice elsewhere on the technical merits of the legal interpretation relied upon.
If the member does not have the relevant expertise or if the promoter does not release all the legal opinions and implementation details to allow an assessment to be made, the member should inform the client that they cannot advise on the arrangement and the member should document this.
In advising on the third party’s arrangement the member should consider the risks and implications below (see the final paragraph before the section ‘Introducing another adviser’s planning arrangement’). In addition, the member should ascertain whether the third party is subject to a monitoring notice under the POTAS regime and the member’s advice should include the implications of a monitoring notice for the client should the client wish to proceed. It is difficult to envisage any circumstance in which it would be appropriate for the member to recommend the arrangement if the third party is subject to a monitoring notice.
The member should also make an assessment of and advise the client on whether there is a sustainable filing position for tax return purposes. The member may suggest amendments to the planning. If so, the member should consider the risks and implications of the amended planning, including the position under DOTAS.
A client may have implemented an arrangement offered by another adviser and the member has not been involved in implementing the arrangement. Subsequently the client may ask the member to enter the arrangement on their tax return. In this case the member is not responsible for advising the client on the potential implications of having undertaken the arrangement. However, from a client relationship perspective the member may wish to advise on the potential risk of a challenge.
A member should not include within the tax return a claim for a tax advantage which they consider has no sustainable basis based on the information provided to them.
If the client provides inadequate information, then the member should make a request for further information which will enable them to confirm that there is a sustainable filing position. If no further information is forthcoming, the member should refrain from including a claim for a tax advantage on the tax return, document their decision and explain their reasons to the client. If additional information is received but it is too complex or outside the member’s level of expertise to allow any reasonable assessment to be made, they should seek specialist support or recommend that the client obtains advice elsewhere. See also Tax returns (see sections: Members responsibilities and Disclosure) and Dealing with Irregularities.