If I had £1 for every time a politician had promised to ‘clamp down on tax avoidance’ I could probably have retired on a very comfortable pension by now. John McDonnell is the latest, pledging a ‘crackdown on city ‘enablers’ of tax avoidance’, as reported in The Sunday Times on 15 September 2019 (‘John McDonnell’s plan to end tax avoidance: send cunning advisers to jail’).
His focus is on ‘schemes that exploit loopholes in the tax laws’. That is a sensible and uncontroversial definition; indeed, the professional bodies’ joint code of professional conduct in relation to taxation (PCRT) clearly states that: ‘Members must not create, encourage or promote tax planning arrangements or structures that ... seek to exploit shortcomings within the relevant legislation’. So, anyone who is an ‘enabler’ of such schemes is either not a member of one of the seven professional bodies or is in breach of the PCRT and should be reported under their disciplinary process.
Mr McDonnell also appears to think that schemes which exploit loopholes are still being promoted by ‘the big accountancy firms’. If you look at the cases which have reached the courts over the last few years, it is true that a number of them involved well-known advisers, including the ‘big four’ (see, for example, my article ‘The Ladbroke case and unallowable purpose’, Tax Journal, 7 January 2016).
However, HMRC’s record in avoidance cases has been strong: between 2014 and 2018, its tribunal success rate for large business avoidance cases was 86% (see the HM Treasury and HMRC report Tackling tax avoidance, evasion and other forms of non-compliance, March 2019).
It’s also worth noting that the impact of the general anti-abuse rule (GAAR) has not yet been fully felt: while the GAAR panel has ruled on a few cases (and so far, all its rulings have been in favour of HMRC), no GAAR cases have reached the courts yet. The GAAR was introduced in 2013, and it typically takes around ten years for a dispute to reach the First-tier Tribunal; hence it is likely to be another five years at least before we see the full effect of the GAAR. Inevitably, this time lag means that the perception of avoidance is likely to be greater than the reality.
Another part of Mr McDonnell’s message is that he wants to ‘have a reform of the concept of professional privilege’ to prevent firms and individuals becoming enablers. He says that there’s been the use by some of ‘an argument around professional privilege to prevent them being open and transparent about the advice and activities they are undertaking.’
I’m not convinced this is right, for three reasons.
First, the PCRT (referred to above) is clear that ‘disclosure should be made whenever required by law’, and it goes on to say that members ‘should not seek to frustrate legitimate requests for information.’
Second, HMRC has wide powers to seek information ‘reasonably required’ to check a person’s tax position. It can, and increasingly does, use its formal information powers, backed up by the tribunal if necessary, to obtain the details it needs. It is true that this sometimes takes too long, and the process could be better-managed, but an adviser who seeks to frustrate the process is both in breach of professional standards (assuming that he or she belongs to a professional body) and is likely to face enforceable demands from HMRC sooner or later.
But what about the defence of professional privilege? The third, and very clear, way in which Mr McDonnell is wrong is that advice given by those who are not lawyers is not privileged. PwC argued very hard that, when acting as tax advisers, their advice was akin to legal advice and so should benefit from privilege, but the Supreme Court disagreed, in the 2013 Prudential case ([2013] UKSC 1). As Dan Neidle of Clifford Chance commented in City AM (15 September 2019), ‘accountants have never had legal privilege’.
So, big firms are unlikely to be enabling tax schemes for a number of reasons – not least the fact that few would expect a contrived scheme to be successful these days. And if they are promoting schemes, their advice will not benefit from legal professional privilege.
Mr McDonnell’s pledge to crack down on tax avoidance is likely to be popular with the general public, but it is in my view very unlikely to be effective or to raise much money. Much has been achieved over recent years, with HMRC’s measure of the avoidance component of the tax gap now only £1.7bn out of total tax receipts of some £700bn (see HMRC’s Measuring tax gaps 2018 report, June 2018).
What could he do instead? He could support the professional bodies and HMRC in clamping down on those ‘rogue’ firms which are still promoting hopeless schemes. Sadly, there are still some around. Reputable professionals would welcome action, particularly to protect taxpayers who may be fooled into spending money by smooth-talking salespeople who claim that schemes are ‘legal’ while not mentioning that they have high financial and reputational risks, and almost certainly won’t work.
If I had £1 for every time a politician had promised to ‘clamp down on tax avoidance’ I could probably have retired on a very comfortable pension by now. John McDonnell is the latest, pledging a ‘crackdown on city ‘enablers’ of tax avoidance’, as reported in The Sunday Times on 15 September 2019 (‘John McDonnell’s plan to end tax avoidance: send cunning advisers to jail’).
His focus is on ‘schemes that exploit loopholes in the tax laws’. That is a sensible and uncontroversial definition; indeed, the professional bodies’ joint code of professional conduct in relation to taxation (PCRT) clearly states that: ‘Members must not create, encourage or promote tax planning arrangements or structures that ... seek to exploit shortcomings within the relevant legislation’. So, anyone who is an ‘enabler’ of such schemes is either not a member of one of the seven professional bodies or is in breach of the PCRT and should be reported under their disciplinary process.
Mr McDonnell also appears to think that schemes which exploit loopholes are still being promoted by ‘the big accountancy firms’. If you look at the cases which have reached the courts over the last few years, it is true that a number of them involved well-known advisers, including the ‘big four’ (see, for example, my article ‘The Ladbroke case and unallowable purpose’, Tax Journal, 7 January 2016).
However, HMRC’s record in avoidance cases has been strong: between 2014 and 2018, its tribunal success rate for large business avoidance cases was 86% (see the HM Treasury and HMRC report Tackling tax avoidance, evasion and other forms of non-compliance, March 2019).
It’s also worth noting that the impact of the general anti-abuse rule (GAAR) has not yet been fully felt: while the GAAR panel has ruled on a few cases (and so far, all its rulings have been in favour of HMRC), no GAAR cases have reached the courts yet. The GAAR was introduced in 2013, and it typically takes around ten years for a dispute to reach the First-tier Tribunal; hence it is likely to be another five years at least before we see the full effect of the GAAR. Inevitably, this time lag means that the perception of avoidance is likely to be greater than the reality.
Another part of Mr McDonnell’s message is that he wants to ‘have a reform of the concept of professional privilege’ to prevent firms and individuals becoming enablers. He says that there’s been the use by some of ‘an argument around professional privilege to prevent them being open and transparent about the advice and activities they are undertaking.’
I’m not convinced this is right, for three reasons.
First, the PCRT (referred to above) is clear that ‘disclosure should be made whenever required by law’, and it goes on to say that members ‘should not seek to frustrate legitimate requests for information.’
Second, HMRC has wide powers to seek information ‘reasonably required’ to check a person’s tax position. It can, and increasingly does, use its formal information powers, backed up by the tribunal if necessary, to obtain the details it needs. It is true that this sometimes takes too long, and the process could be better-managed, but an adviser who seeks to frustrate the process is both in breach of professional standards (assuming that he or she belongs to a professional body) and is likely to face enforceable demands from HMRC sooner or later.
But what about the defence of professional privilege? The third, and very clear, way in which Mr McDonnell is wrong is that advice given by those who are not lawyers is not privileged. PwC argued very hard that, when acting as tax advisers, their advice was akin to legal advice and so should benefit from privilege, but the Supreme Court disagreed, in the 2013 Prudential case ([2013] UKSC 1). As Dan Neidle of Clifford Chance commented in City AM (15 September 2019), ‘accountants have never had legal privilege’.
So, big firms are unlikely to be enabling tax schemes for a number of reasons – not least the fact that few would expect a contrived scheme to be successful these days. And if they are promoting schemes, their advice will not benefit from legal professional privilege.
Mr McDonnell’s pledge to crack down on tax avoidance is likely to be popular with the general public, but it is in my view very unlikely to be effective or to raise much money. Much has been achieved over recent years, with HMRC’s measure of the avoidance component of the tax gap now only £1.7bn out of total tax receipts of some £700bn (see HMRC’s Measuring tax gaps 2018 report, June 2018).
What could he do instead? He could support the professional bodies and HMRC in clamping down on those ‘rogue’ firms which are still promoting hopeless schemes. Sadly, there are still some around. Reputable professionals would welcome action, particularly to protect taxpayers who may be fooled into spending money by smooth-talking salespeople who claim that schemes are ‘legal’ while not mentioning that they have high financial and reputational risks, and almost certainly won’t work.
