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Raising standards in the tax advice market

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As promised in its response to the independent loan charge review, the government has published a call for evidence on raising standards in the tax market. This seeks input on the current operation of the market and potential approaches to raising standards. Whilst the government’s aim is to target a minority of tax advisers who do not provide a high-quality service to their clients, some of the approaches the government is considering (including external regulation) would impact tax advisers across the market. Comments are invited by 28 August 2020.

As trailed at the Budget, the government has launched a call for evidence on raising standards in the ‘tax advice market’. This is aimed at a minority of tax advisers who do not provide a good value service to their clients. However, given the far-reaching nature of some of the potential approaches to tackling this issue, the call for evidence and any future policy proposals will be of interest to the tax market as a whole, both advisers and taxpayers.

What has prompted this?

The government promised this call for evidence in its response to the independent loan charge review carried out by Sir Amyas Morse (‘the review’), which was published at the end of last year. The review was commissioned to consider whether the loan charge (which had been the subject of intense criticism in terms of both design and its impact on the individuals concerned) was an appropriate response to the disguised remuneration avoidance schemes in question.

The review found that a number of taxpayers had entered into these schemes on the advice of their tax advisers and did not understand that the schemes would be considered tax avoidance. They subsequently found themselves with very large tax bills and no form of recourse against their advisers.

Sir Amyas expressed a great deal of sympathy for these individuals, noting that they were not the ‘usual suspects’ (i.e. large corporates and very rich individuals with ‘an army’ of professional advisers). He considered that it was regrettable that the state of the tax advice market was such that a large number of people were seemingly misled by unscrupulous promoters, and noted that despite the steps that HMRC has taken in recent years (including improvements to the disclosure of tax avoidance schemes (DOTAS) regime and the introduction of the promoters of tax avoidance schemes (POTAS) regime) it remained challenging for HMRC to combat promoters of tax avoidance schemes.

The review concluded that the government needed to do more to tackle promoters, and recommended that it publish a strategy setting out a more effective system of oversight for tax advisers (including, potentially, formal regulation). The call for evidence is part of the government’s response to this recommendation, together with additional measures aimed specifically at promoters of tax avoidance schemes.

The call for evidence mentions other examples of poor practice in the tax advice market, which may also have encouraged the government to look at raising standards. Some of these arrangements are high-profile and have attracted a significant amount of media interest, in particular film tax relief schemes. Again, many investors in these schemes were not fully aware of the risks involved and relied on the recommendation of trusted financial advisers. When the schemes were defeated investors were hit with large bills and had no recourse against the promoters who had convinced them to enter into the schemes. There have been media reports of investors having to sell homes, declaring bankruptcy and, in a few particularly sad cases, committing suicide.

Whilst taxpayers are ultimately responsible for their own tax affairs (and the call for evidence is clear that this should remain the case), the government recognises that it is important that taxpayers are able to seek advice and have confidence that it is reliable, amongst other reasons so that they are not tempted into avoidance by promoters.

What is HMRC calling for evidence on?

The call for evidence focuses on the following:

  • The diversity of the tax advice market, including the distinction between tax advice and tax services. The government notes that there is no ‘one size fits all solution’ and acknowledges that it is important that any proposals do not adversely impact the majority of tax advisers who already provide high standards of service.
  • The impact and characteristics of good and bad tax advisers. In addition to seeking views on whether there are parts of the market where there are particular problems and how this can be addressed, the government is interested in how good advisers add value and how this could be promoted and extended.
  • The impact of current government interventions in the market, both in the tax sphere and other areas. The government is also seeking views on the approaches taken by other jurisdictions.
  • Possible approaches to raising standards. A number of potential options are set out, ranging from better use of current powers to introducing a new external regulatory body. Comments on each option, as well as more general comments, are invited.

What is the ‘tax advice market’?

The call for evidence covers both advisers that provide tax advice and those that provide tax services, although the scope of the work carried out by each group and the distinction between the two is not clear (and is one of the areas on which views are sought). The example given in the call for evidence is that of an adviser who prepares a tax return (including calculating liabilities) and then files the return. Such an adviser is providing both tax advice and tax services. This can be contrasted with a payroll provider or a bookkeeper, who simply provides a service relating to tax. Whilst not explicitly made clear, the fact that the government is seeking to distinguish between these two groups (and the acceptance that there is likely no one-size fits all approach) suggests that different approaches could be taken for each group.

However, even only taking into account those providing tax advice, there is a broad array of advisers, ranging from accountancy firms and agents for whom providing tax advice is their primary function, to the voluntary and community sector. There is even a mention of friends and family providing informal advice.

The references elsewhere in the call for evidence to ‘consumers’ and advice provided on a ‘commercial basis’ suggest that any new measures will not be aimed at friends and family or the voluntary sector, but this does serve to illustrate the importance of clearly defining who is within the scope of any new rules. It will also be important to bear in mind that if burdensome new measures are introduced and the net is cast widely then large sections of the voluntary sector may no longer be able to provide tax advice, leaving some consumers without access to tax advisers altogether. This would undermine the government’s aim of preserving market access and enhancing tax compliance.

What measures already exist?

The current system of maintaining standards relies to a significant extent on membership of professional bodies, which set standards and minimum requirements, with penalties for non-compliance. However, there is no requirement for a tax adviser to be a member of a professional body. Given that tax advisers who are not members of professional bodies are most likely to fall below an acceptable standard, it is these advisers that HMRC is particularly concerned about.

Partly to address the fact that not all advisers are affiliated to a professional body, HMRC updated its ‘standard for agents’ (the ‘standard’) in 2018 to include requirements for providing advice on tax planning. The standard applies to all those involved in professionally representing or advising taxpayers, both onshore and offshore. It requires agents not to encourage or promote tax planning arrangements which set out to achieve results that are contrary to the clear intention of Parliament in enacting legislation or are highly artificial or contrived. The standard also imposes an obligation on agents to advise clients where there is material uncertainty in the relevant legislation. However HMRC’s powers when the standard is found to be breached are limited, particularly where agents are not members of a professional body and do not deal with HMRC directly.

The call for evidence also includes a long list of more specific ways in which HMRC is able to target poor adviser behaviour, including using their powers under DOTAS and POTAS to penalise those who enable avoidance. HMRC claim that these tools have helped to address the problem, with around 20 promoters leaving the tax market since 2014. However, the market is constantly evolving and promoters are able to sidestep their obligations, including by basing themselves offshore. It is perhaps with this in mind that the call for evidence expressly covers the market for tax advice and services in respect of both onshore and offshore advisers.

What can be learnt from elsewhere?

Government interventions in the market are of course nothing new, and the call for evidence asks whether lessons can be learnt from other interventions, both in the UK and abroad.

In the UK, the introduction of strengthened regulation of the financial advice market is the most directly comparable example. Following a similar review into raising standards, all financial advisers must sign up to a code of ethics, be qualified to a certain level and have up to date knowledge (which is accredited)

Looking at international models, Australia requires all paid tax practitioners to register with the same professional body, satisfy a fit and proper person test, have relevant qualifications and experience and have appropriate professional indemnity insurance cover. Similarly, in Germany, all tax advisers must be a member of one of the regional tax adviser chambers and are required to be professionally qualified and take part in continuing professional development. The call for evidence also lists the Czech Republic, Norway and Portugal as examples of international models that could work in the UK.

What is being proposed?

A variety of approaches are considered in the call for evidence, and it is made clear that they are not mutually exclusive (i.e. each could be considered in conjunction with any of the others). The government does not express a preference for a particular approach and invites other suggestions.

The options set out in the call for evidence are:

  • Better use of current powers, including DOTAS and POTAS.
  • Improving rights of recourse for consumers by setting up an independent complaints or arbitration process (such as a tax ombudsman) and / or requiring all tax advisers to have professional indemnity insurance.
  • Helping consumers make better choices, which would improve the overall market through removing business from poor advisers. Options considered include setting up an independent web-based rating service similar to TripAdvisor or Trustpilot, or using a government endorsed scheme such as TrustMark or a method of ‘kitemarking’ good agents (as is done in Australia and New Zealand).
  • Penalties for tax advisers, so that they are accountable for their work. Currently taxpayers remain responsible for their tax affairs, even for errors or avoidance on the part of their tax adviser. One option suggested is levying penalties on the adviser instead of, or in addition to, the client.
  • Maximising the regulatory/supervisory role of current professional bodies by requiring anyone who wishes to provide tax advice on a commercial basis to belong to a recognised professional body (with prescriptive criteria for recognition, including a requirement for members to demonstrate professional competence through qualifications and experience and have professional indemnity insurance).
  • External regulation. The most extreme option floated is to require anyone who wants to provide tax advice on a commercial basis to register with a new government regulator. Advisers could be subject to regular reviews of their fitness and propriety, with enforcement action taken against those who breach standards.

Given the public and political support for greater regulation of the tax market, it seems inevitable that we will see changes in the not too distant future. It also seems likely that any approach will involve a combination of these options.

The examples of other interventions referred to above have certain common elements, including a requirement to belong to a professional body and to demonstrate professional competence. Introducing similar requirements in the UK for all paid tax advisers, alongside common minimum standards which all professional bodies must require (including an obligation to maintain adequate professional indemnity insurance), would go a long way to achieving the government’s aim of raising standards in the tax advice market without adversely impacting the majority of tax advisers who are already providing high quality advice to their clients.

Introduction of a government regulator would need to be carefully thought through. There is a risk that this could unduly restrict market access, which is contrary to the stated aims of the government in intervening in the tax market, as well as the clear potential for conflicts of interest (given the government’s interest in collecting as much tax as possible).

Next steps

The call for evidence was open until 28 May 2020 but has been extended until 28 August 2020, and there is also an opportunity for interested parties to participate in roundtable discussions with HMRC.

Whilst it is hoped that future proposals in this area will be appropriately targeted at the minority of advisers who are not providing the expected standard of service to clients, at this stage it is not clear what approach the government will take. Tax advisers across the market should therefore make sure that their views are taken into account as the proposals develop.

The call for evidence is available at