Accountants - Watch Out!

The Revenue's recent announcement that it has recruited around 40 qualified accountants to its ranks means that investigations into practitioners' professional standards look set to be resurrected. There is already clear evidence that districts are being given responsibility for a role that has traditionally been the sole remit of Special Compliance Office.
Furthermore, a pilot scheme that has been set up over the past few months to monitor tax practitioners' standards of work is also set to increase pressure on practitioners. Under the scheme, the Revenue will be able to report errors to the practitioner's professional body in order for corrective (or disciplinary) action to be taken. The move is seen as a correction of the apparent imbalance between the practitioners' public anonymity and the Revenue's accountability through its various Codes of Practice.
The Revenue began recruiting qualified accountants to the district network around three years ago. This campaign has virtually doubled the accountancy resources previously available nationwide to the department and they will be used in compliance and investigative matters.
It is clear, however, that they are likely to be used to investigate what the Revenue classes as 'centres of infection', those professional advisers whose work is either grossly incompetent, or worse, dishonest, which could lead to a serious loss of tax to the Exchequer.
Traditionally, the 30 or so accountants working in Special Compliance Office have carried out these investigations. However, the rationalisation of the former Enquiry Branch, Special Office and Accountancy Units in the mid-1990s has since seen these accountancy resources being used almost exclusively in Hansard and criminal investigations.
Consequently, the number of investigations into the standards of professional advisers has dwindled. Clearly, this situation is about to change and the district network's resources appear to be about to fulfil this role.
Fulfilling a need
The Revenue's reliance on the competence and honesty of the professional advisers involved in the tax process is paramount. A solitary errant taxpayer represents a relatively minor threat to the Inspector of Taxes compared with an incompetent or dishonest practitioner on whom a large number of taxpayers rely for making correct tax returns.
Practitioners who are considered to be 'centres of infection' immediately fall into the heinous category, that is, they are given no protection (such as under the Hansard policy) when being considered for criminal prosecution. This is because of the special nature of their relationship with the Inland Revenue. After all, they belong to the only class of taxpayer that the Revenue trusts or, rather, has to trust to make the tax system work.
In every instance where tax has been found to have been under-declared in previous returns, one particular question will always feature in the Inspector's thoughts: 'Who is to blame for the irregularities?'.
The Inspector will understandably become particularly concerned where the answer to this question casts doubt on the professional practitioner's competence or honesty. Depending on several factors that must be considered before any further action is taken, ensuing enquiries could result in a report being made to the practitioner's professional body under the aforementioned pilot scheme.
However, if more serious irregularities are suspected, then a number of other consequences may flow from this. As will be explained later, these include:
? a financial penalty being levied under section 99, Taxes Management Act 1970 (and subsequent action under section 20A, Taxes Management Act 1970);
? criminal prosecution; or
? a request to cease in practice.
In the past, given the serious nature of these potential consequences, any investigations into these irregularities have always been the sole remit of the accountants in Special Compliance Office (previously Enquiry Branch/Accountancy Unit). In its various guises, this head office unit has been carrying out such investigations since the 1950s, so it is both experienced in dealing with potentially criminal investigations, and well positioned through its prosecution group to commence proceedings if necessary.
It is clear that this approach has changed and appears to contradict the guidelines set out in the Revenue's own Investigations Handbook. For the unwary professional, this sea-change could prove extremely hazardous; for the wary, perhaps not.
General guidance
Professional advisers will know that any investigation into a client's tax affairs is fraught with potential danger. Like it or not, the adviser's own standards will always be under scrutiny throughout. Hence, in future, pressure is likely to mount in the knowledge that a practitioner's work could be reported to his or her professional body, or worse, be investigated by the Revenue.
There have been instances in the past where Inspectors have raised concerns based on only some of the available evidence. In those cases where it is apparent that a practitioner's actions, or inactions, have led to an under-declaration of tax, it is important that the matter is put into context: is it an isolated instance, or does it suggest that there may be similar irregularities in the affairs of the practitioner's other clients? For example, is the practitioner, when acting in an auditing capacity, in the habit of merely accepting the director's valuation of stock without further testing? If so, then the returned profits for a number of clients may be incorrect.
Professional bodies
If the current pilot scheme is implemented nationwide, Inspectors will be able to report examples of practitioners' poor work to their professional bodies. It is highly unlikely that every instance would be reported for this would otherwise devalue the significance of the Revenue's concerns. Nevertheless, practitioners should be alert to the threat of reporting being used as a negotiating tool. In these instances, in particular, evidence will be required to put matters into perspective.
Wider-ranging investigations
In those instances where a professional adviser is considered to be a 'centre of infection', more in-depth enquires will take place. There are differences of which the professional adviser should be aware between such an investigation being carried out by Special Compliance Office and by a district office. Before discussing these, however, the wary practitioner should be mindful of the methods employed in an investigation.
Investigations of professional advisers usually start with a seemingly innocuous letter from a Revenue officer requesting a meeting. If it is not clear from the letter itself, it is always good practice before responding to the request to identify the writer, his or her role in the Revenue, and the reasons for the meeting. Whether the meeting takes place, and whether the practitioner is professionally represented at the meeting, depends on the answers to those questions.
If the meeting does take place, ordinarily it will be led by a Revenue accountant. These are qualified accountants who have worked previously in accountancy practice. They have a good understanding of technical accounting and auditing issues, possibly some tax knowledge, together with first-hand experience of working in a busy, pressurised, commercial environment.
The meeting is designed to make the practitioner aware of the Revenue's concerns about his work, and to seek explanations about how apparent errors arose in it. Some of the issues being discussed may have taken place some years before, for example, the repeated failure to disclose an overdrawn director's current account.
Despite the Revenue's encouragement to obtain explanations for these errors at the meeting, and many practitioners' willingness to co-operate in order to provide them, it is neither the time nor the place to do so.
In those instances where matters have become so serious that the Revenue has resorted to this form of action, its officers are entitled to receive some explanation. Equally, however, whatever conclusion is drawn about the practitioner's work must be based on all of the available evidence.
It is highly unlikely that the meeting will afford either the Revenue officers or the practitioner the opportunity to do so. In the event, responses to any questions raised about the practitioner's work should be politely deferred until all relevant evidence has been gathered.
In the writer's experience as a former Revenue accountant who worked on many such cases, it is alarming to report that none of the practitioners involved suggested that responses be deferred until all evidence had been gathered. Most, in the spirit of goodwill and co-operation, attempted to rely on their memory of events that took place many years before. This was an unsatisfactory situation for all concerned. Practitioners, finding themselves alone in a stressful and confrontational situation, sometimes gave responses that they thought would alleviate the problem but, more often than not, exacerbated the situation when their explanations were subsequently cross-checked with other information. For the Revenue, its officers could be given explanations that are incomplete and inaccurate because of the passage of time since the events themselves took place.
If an adviser, having considered all of the relevant evidence, has to admit that his standards of work have been found wanting, the next step for the Revenue is to determine the extent of the problem.
Continuing from the earlier example, if the Revenue's concerns have arisen over the repeated non-disclosure of an overdrawn director's current account in one client's affairs, then it is likely to question how many other clients are in a similar position.
Naturally, the Revenue will wish to receive comfort that returns submitted in future on behalf of the practitioner's clients can be relied upon. In so doing, its officers will usually seek the practitioner's approval to be given access to a representative sample of accounts, audit and tax working papers, together with correspondence files, for other clients. The aim of this is to determine the extent of their concerns and to assess the standard of the practitioner's work across a range of clients.
At first sight, this appears to be a reasonable request to make. If the Revenue is to continue to rely on the practitioner, then a way must be found to restore the trust that it places in him. However, this suggestion is fraught with danger for the practitioner. Firstly, given the professionally embarrassing situation in which he finds himself, experience shows that the practitioner is unlikely to obtain the clients' approval to release papers, thus breaching client confidentiality. Secondly, once papers are released, the practitioner has no control over how the Revenue will view them, or what conclusions its officers will draw from them.
Furthermore, it is unlikely that the Revenue will ignore any significant errors that it discovers in the affairs of those clients that have been sampled. It is more likely that their affairs will also be taken up for investigation.
In these instances it is more appropriate to instruct a specialist accountancy adviser whose role will be to mediate between the parties. If the Revenue's concerns and requests are considered to be appropriate, the specialist can arrange to carry out an independent review of the sample, provide a report for both the practitioner and the Revenue, and assist in determining what action, if any, is required in respect of the review's findings and to regularise the situation for the future.
The law and Revenue action
Of course, the above situation relies on the goodwill of the parties involved to reach an outcome that is satisfactory to all. But there are instances where the law overtakes these discussions.
Section 99, Taxes Management Act 1970 has long been a relatively unknown section of the Taxes Acts, but it is a valuable weapon in the Revenue's statutory armoury. At first sight it appears to be a simple section but its effects can be far reaching. It reads as follows.
'Any person who assists in or induces the preparation or delivery of any information, return, accounts or other document which
(a) he knows will be, or is or are likely to be, used for any purpose of tax, and
(b) he knows to be incorrect,
shall be liable to a penalty not exceeding £3,000.'
The wording of the section was amended slightly, and the amount of penalty increased from £500 to £3,000, by Finance Act 1989. The maximum penalty of £3,000 can be levied for each and every offence, so the financial implications can be severe. Offences committed within a time limit of six years before 27 July 1989 were each liable to a penalty not exceeding £500.
Further changes to the legislation in Finance Act 1989 also allows an Officer of the Board to formally assess penalties under section 99, Taxes Management Act 1970. After 27 July 1989, proceedings can be commenced, or a penalty determination made, at any time within 20 years of the date when the offence took place.
Since its amendment in Finance Act 1989, penalties have been levied against a range of individuals, including members of in-house accounting departments and business proprietors who provide customers with blank or misleading receipts. Principally, however, the section is used against practitioners who take a significant role in dealing with clients' tax affairs.
It is used mainly in those instances where either:
? a practitioner has provided full co-operation in an investigation into his own professional standards but the matters involved are so serious that they warrant a monetary penalty; or
? a practitioner refuses to allow voluntary access to working papers and the Revenue seeks this through formal procedures under section 20A, Taxes Management Act 1970, as are explained below.
The Revenue's ability to assess a section 99 penalty is a powerful tool because, unless the practitioner pays it, he will have to appeal against the assessment before the Commissioners. When practitioners are reluctant to provide voluntary access to a sample of working papers, the threat to seek a formal penalty under section 99, Taxes Management Act 1970 is sometimes used as a negotiating tool by the Revenue.
The wary practitioner should, however, recall that the case of Inland Revenue v Ruffle [1979] SC371 established that, in order to seek penalties under this section, a very high standard of proof should be imposed on the Revenue. In particular, the Revenue should:
? show that the information or return was to be used for the purposes of tax;
? show that the information/return was incorrect; and
? establish when the alleged 'assisting or inducing' took place.
Both the Revenue and the practitioner will therefore need to carefully consider all of the relevant evidence in light of the Ruffle case in order to decide whether an appeal before the Commissioners is likely to satisfy these requirements. It may also persuade the parties to find alternative means of resolving their concerns in these instances.
Formal penalty determinations
As mentioned earlier, the formal determination of a penalty under section 99, Taxes Management Act 1970 can also lead to further problems for the practitioner.
With the appropriate judicial authority, section 20A, Taxes Management Act 1970 gives the Revenue statutory access to the working papers of any tax accountant (as defined by section 20D) against whom a penalty under section 99, Taxes Management Act 1970 is levied. Section 20A reads as follows:
(1) Where a person
(a) is convicted of an offence in relation to tax (whenever committed) by or before any court in the United Kingdom; or
(b) has a penalty imposed on him under section 99, Taxes Management Act 1970,
and he has stood in relation to others as a tax accountant, an Inspector authorised by the Board for the purpose of this section may by notice in writing require the person to deliver to him such documents as are in his possession or power and as (in the Inspector's reasonable opinion) contain information relevant to any tax liability to which any client of his is or has been, or may be or have been, subject, or to the amount of any such liability.'
Formal access to working papers can be gained under this section within one year of the formal award of a section 99 penalty. Access will raise many of the issues discussed previously in this article. Because of this, practitioners who consider that the Revenue has good grounds on which to raise, and formally determine, penalties under section 99, Taxes Management Act 1970 will be well advised to seek alternative means to addressing and allaying the Revenue's concerns, such as an independent adviser.
Criminal prosecution
Professional advisers fall into the heinous category when considered for criminal prosecution by the Revenue. This means that, unlike the vast majority of taxpayers, they are afforded no protection when serious irregularities are discovered.
Practitioners who, either through the type of investigation discussed elsewhere in this article, or at any other time, consider that they may have committed serious offences for which the Inland Revenue would seek to prosecute should take appropriate legal advice from a solicitor specialising in criminal law.
The practitioner's future
In the most exceptional instances, the Revenue will consider that the 'centre of infection' is so bad that the practitioner will be advised to consider ceasing in practice altogether. The Revenue has no statutory powers to enforce such a suggestion. However, it will claim that, unless the practitioner heeds this advice, every return submitted in future will be taken up for enquiry.
In practice, the Revenue does not have the resources to enforce this proposal but any suggestion along these lines should be viewed as an indication of its deep concerns about the practitioner's work. Again, some form of mediation can usually allay the Revenue's concerns and leave the practitioner in practice.
Changes in procedures
The reader will by now see why, because of the serious implications involved, investigations into practitioners' professional standards have traditionally been the sole remit of Special Compliance Office. Indeed, section 4760 of the Revenue's own Investigation Handbook gives the following instructions to Inspectors in the district network:
'The main use of section 99, Taxes Management Act 1970 is against dishonest accountants and your action is limited to reporting suspected cases to Special Compliance Office.'
It is clear that the Revenue has determined that its newly-acquired district accountancy resources are now able to undertake such investigations.
It is apparent that the district network has yet to gain the experience needed to investigate incompetent advisers. Furthermore, until such time as the Revenue clarifies the position, neither has the district network the remit to criminally prosecute dishonest ones.
Consequently, it follows that districts could be used to make the initial challenge into a practitioners' professional standards, with only the most serious of cases then being referred to Special Compliance Office. If so, then until such time as districts have gained the experience required to assess whether or not a practitioner has committed an allegedly serious offence, wary practitioners should approach with caution any indications that a district wishes to review their work.
Advice to practitioners whose professional standards come under scrutiny from the District network is clear:
ascertain what is the investigating Revenue officer's experience of carrying out such investigations; and
determine why the district and not Special Compliance Office is undertaking the investigative role (it may, for example, be that Special Compliance Office does not regard the matters as serious enough to warrant its involvement).
Additional advice to practitioners whose standards come under scrutiny by either the district or Special Compliance Office is to:
ascertain the Revenue's concerns as soon as possible;
only provide responses to those concerns once all relevant evidence has been obtained and carefully considered;
consider both parties' respective positions if section 99, Taxes Management Act 1970 proceedings are being considered;
take specialist independent accountancy advice where this is considered appropriate; and
take immediate legal advice if it is possible that the Revenue will institute criminal proceedings.
Barry Draper is a director of forensic accounting with Gambit Corporate Finance and can be contacted on 0117 922 6400 or 029 2066 7799.

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