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Having a laugh?

02 March 2010 / Mike Truman
Issue: 4245 / Categories: Comment & Analysis , Working with Tax Agents
MIKE TRUMAN can’t see the funny side of the draft legislation on deliberate wrongdoing
  • Draft legislation on deliberate wrongdoing is a disaster.
  • ‘Deliberate wrongdoing’ covers normal tax advice.
  • Definition of relevant documents is open-ended.
  • Penalties are per member of staff, not per firm.

It’s a joke. It must be a joke. Some sort of subtle parody of tax legislation, that almost looks as if it makes sense until you work out what it really means.

That, surely, is the only conclusion one can come to when looking at the draft legislation on ‘deliberate wrongdoing’ by tax agents that was issued on 8 February.

The alternative – that HMRC actually thought this was a proportionate and reasonable piece of legislation to introduce, which tied in with the consultation and the responses to it – is just too horrible to contemplate.

Deliberate wrongdoing

As part of the modernising powers, deterrents and safeguards process, HMRC issued Working with Tax Agents with the budget last year. The responses to this informed Working with Tax Agents: The Next Stage, issued on 9 December 2009.

This latter consultation document had several chapters which dealt with deliberate wrongdoing by tax agents. it defined deliberate wrongdoing as ‘conduct that tax legislation previously described as fraud or dishonest evasion’, but noted that HMRC guidance now referred to it as ‘knowingly and intentionally wrong’, and resulting in a loss of tax.

It specifically did not mean ‘tax planning, or otherwise taking a defensible view which is at odds with HMRC’s interpretation of the legislation’.

Fraud is, of course, a criminal offence. However, according to the consultation document:

‘HMRC believes it needs an alternative effective suite of civil remedies that deter deliberate wrongdoing from the start, and that allow it to deal effectively with those cases where criminal prosecution is not an option.’

That’s where the first alarm bells start ringing. We can’t prove that the agent concerned was fraudulent to the standards required by a criminal court, but we still want to treat him as fraudulent and impose a civil penalty. Since the consequences of the civil penalty are likely to be the destruction of his practice, is the civil standard really the right one to adopt?

But that’s only what the consultation document said. The draft legislation bears no relation to it whatsoever. Here is its definition of what constitutes ‘deliberate wrongdoing’:

‘3 (1) A tax agent engages in deliberate wrongdoing if, with respect to the tax affairs of one or more clients—

(a) the tax agent does an act that is capable (directly or indirectly) of bringing about a loss of tax, and

(b) the act is done deliberately, with the intention of bringing about such a loss.’

‘Loss of tax’ is a loss involving a ‘relief, reduction, repayment or credit of any kind’. Subparagraph 1(a) applies ‘in particular’ (but not ‘only’) to actions where clients would have been subject to a penalty had the client done the act.

Like I say, it’s a joke. It has to be a joke. Because if it was meant to be serious, any tax planning advice of any sort given by a tax agent would have fallen within the definition of ‘deliberate wrongdoing’.

If I advise a client with income of £103,000 next year to make a £3,000 gross pension contribution, getting effective tax relief at 60%, I have ensured that the Exchequer has lost £1,800.

I have not done so in a way which would have triggered a penalty, but that is only an area where the definition applies ‘in particular’, it is not exhaustive.

Even if it was a necessary condition that a penalty could be imposed, this would still be nowhere near the narrow target as outlined in the original consultation document.

This was meant to be agents who were so fraudulent that prosecution was only not pursued because the case wasn’t quite strong enough.

Dwile flonking

Having defined ‘deliberate wrongdoing’, the phrase can now be used in the rest of the legislation to make it look more reasonable.

There are two broad consequences of agents having been engaged in ‘deliberate wrongdoing’; all of their working papers, for any client, can be seized by HMRC, and a penalty can be imposed.

I am going to come on to the problems with both of those provisions in the way that they are set out even if they were only applied to those who had engaged in something that could genuinely be called deliberate wrongdoing, but let’s just stay with the consequences of the sleight of hand which this definition has performed.

Take the following sentence, which is para 24 of the proposed legislation:

‘A tax agent who engages in deliberate wrongdoing is liable to a penalty.’

I have no problem at all with that statement on its own. But ‘deliberate wrongdoing’ here does not carry its dictionary definition. It carries the meaning that was given to it earlier in the schedule, which requires neither intention nor misconduct.

All it requires is that the agent has advised the client in such a way as to reduce his or her tax bill. The definition could just as easily have referred to dwile flonking, and the penalty imposed on any tax agent who engages in dwile flonking; it would have had precisely the same effect.

The true meaning of the words is irrelevant. It is the definition that matters.

Confiscating papers

As mentioned above, one of the two main consequences of an agent engaging in dwile flonking – I’m sorry, in ‘deliberate wrongdoing’ – as defined, is that a ‘tax agent notice’ may be issued to them. This can require the production of ‘relevant documents’.

Relevant to what, you may ask? Have you not got the hang of this yet?

The December consultation said that this would apply to ‘working papers’, and gave some indications of what this might typically cover. The draft legislation says:

‘Relevant documents means the tax agent’s working papers and other documents including…’

Just a moment, what sort of definition is that? We can argue about what working papers means, and we can argue about the two paragraphs that follow ‘including’ (not reproduced here, but which cover more or less any documents relating to clients) but what else does ‘other documents’ encompass apart from those defined after ‘including’?

It would appear to be limited only by the requirement that they are ‘other documents’ of the tax agent. His diary? Her personal correspondence? A Christmas card list?

I have no idea; and nor, does it seem, has the parliamentary draftsman. You might want to argue that the breadth of ‘other documents’ is limited by the examples which follow, but it is not an argument which gives me much reassurance.

Taking a tax agent’s working papers is more or less a death sentence on the business. And yet the original proposal, both in the consultation document and the legislation, was that it would be possible for the application to be made without the agent being present.

The consultation proposed that this would only be for a small number of cases where HMRC had to protect their sources; the draft legislation was phrased in such a way that it seemed to be the default position.

The consultation document, recognising the seriousness of confiscating the contents of a tax agent’s filing cabinets, said there would be ‘strong safeguards’.

In the draft legislation these turned out to be a requirement that the agent be given an opportunity to ‘make representations’ to an officer of HMRC and that the tribunal had been given a summary of those representations – presumably prepared by HMRC.

It is hard to see how such a provision could be certified as meeting the requirements of the Human Rights Act, so it is perhaps unsurprising (though none the less welcome) that it has already been dropped.

When confirming that the deadline for consultation on this legislation was to be extended to 28 April, HMRC also confirmed to the representative bodies that they would not be pursuing the option of a ‘no notice’ hearing. 


The other consequence of engaging in ‘deliberate wrongdoing’ is that the agent opens himself up to a penalty.

This would be up to 100% of the potential tax lost, with a minimum penalty of £5,000. There could be reductions for disclosure, but the absolute minimum after full and unprompted disclosure would be a penalty of £1,500.

However, this would only be applicable if an agent made a disclosure when they had no reason to believe that HMRC were about to discover it.

Since the result would be to open up the possibility of the confiscation of working papers and therefore the destruction of the practice, how many agents are going to do that? Realistically, therefore, the minimum is £2,500, after a 50% reduction for prompted disclosure.

There has already been a lot of coverage of the scope of the term ‘tax agent’, which appears to cover advice from ‘that bloke down the pub’.

However, there is a further problem with the definition for ‘proper’ agents. The definition of an agent is individual, and not by firm. The definition paragraph explicitly says:

‘If a client is assisted by more than one individual in a firm or business, each individual may be regarded as a separate tax agent.’

Then there is this little beauty stuck in the middle of the paragraph dealing with penalties:

‘If a deliberate wrongdoing involves more than one type of tax or affects more than one tax period, the tax agent is liable to a separate penalty for each type of tax and each tax period.’

Say that in the practice of Snoring & Dolittle, the senior partner Mr Snoring has for many years adopted the practice of including a £520 use of home deduction in all self-employed accounts, even when no allowable use is made of the home. HMRC discover one instance of this, asks about their other clients, and the firm owns up. What penalties are due, and on whom?

The firm has a tax manager, Ms Mystit, and two tax seniors, Mr Tickit and Mrs Bash. Bash and Tickit both have ten clients for whom the £520 deduction has been wrongly claimed, and the accounts have been reviewed and agreed by Ms Mystit and Mr Snoring.

The amount of tax and NI lost per client, given that they deal mostly with basic rate taxpayers, is less than £150 a year, but that is irrelevant to the penalty. That amounts to a minimum of £2,500 – per tax.

Since we are talking here of income tax and NI, that is £5,000 per client, £50,000 in total for each tax senior.

This just happens to be the total annual cap on penalties which can be charged on a tax agent, but the word ‘annual’ refers here to the accounting periods ending in the same calendar year.

Let’s say five years for each of them, a cool quarter of a million pounds each.

Plus a further quarter of a million for each of Ms Mystit and Mr Snoring, that makes a nice round million, please. Oh, and who is going to pay the penalties of Tickit, Bash and Mystit? The firm?

But that is meeting their pecuniary liability, so we’ll have to gross the payments up and work out the PAYE.

The size of the problem

At this point it is appropriate to ask, if HMRC are going to borrow weaponry from the gods of Asgard to wield at this problem, precisely what size is the nut we are trying to crack?

How many agents are engaged in what would genuinely be considered ‘deliberate wrongdoing’ and how much tax is being lost?

The consultation document gave a figure of £25 million, but indicated that it was spread over several years. The ICAEW Tax Faculty has now finally been given more information .

Back in 2005, HMRC identified the total tax loss, in direct tax cases only, from civil cases where access to working papers had been sought. The total in cases from ‘the early 1990s’ up to 2005 was £20 million from sixteen cases.

To this was added some £8 million from three further criminal prosecutions against agents from 2005 to 2009 (with the final figure rounded down).

That is not all the tax lost because of fraudulent agents; it only covers direct tax cases, and there are obviously some who do not get caught.

But it beggars belief that a system so wide-ranging and so penal is to be introduced to deal with an average of less than one case a year, with a tax loss of less than £2 million.

As I mentioned above, the time limit for responding to this consultation has been extended. I intend to submit this article as a formal response to the consultation on the draft legislation.

It may be argued that it does not propose any specific amendments to improve it. That is because I believe the only proper course of action is to rip it up completely and start again.

1 Comments Hide
REBECCACAVE, 03/04/2010 15:11:00

This draft legislation is obviously complete rubbish. HMRC should admit that there has been a fundamental drafting error and withdraw the draft legislation completely and immediately. It is an insult to the professional organisations, and the volunteer members of those organisations, to ask them to waste time commenting on this defective draft. The whole episode also undermines confidence in the consultation process. 

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