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KEY POINTS
- The original draft legislation has been rewritten.
- Agents redefined and safeguards improved.
- A new definition of dishonest conduct.
- A full disclosure will mitigate the penalty.
- An insight into HMRC’s policy development.
- Views required by 16 September 2011.
HMRC want your views on the revised draft legislation about dishonest tax agents. Tax practitioners will remember that the department published draft legislation last year which caused some worry and anger amongst tax agents.
HMRC’s data is not as full as we would like but, while we don’t think there are lots of dishonest agents, even a single agent can have a big tax impact across all their clients.
Agents hold an important position of trust within the tax system and everyone agrees that if a tax agent is dishonest then they need to be dealt with. But tax agents right across the board made clear that the definitions and safeguards we put forward last year were not right.
So we went away and pretty much started again.
First things first
The first thing we dropped was the term ‘deliberate wrongdoing’. While we think this carried the right weight, we are now targeting ‘dishonest conduct’, which is a more familiar concept.
We have also changed the definition of loss of tax; and where, hitherto, ‘tax agent’ was widely defined, now – as explained below – it only catches those in business. Taken together, these changes should make it clear that giving tax advice on the radio, or talking about ISAs or advising on tax avoidance will not be penalised, but dishonest advice will be caught.
We have also made big changes on safeguards. We heard very clearly that: you don’t trust HMRC to get things right in all cases; you don’t want HMRC to be judge and jury; and, if you were to be accused of dishonesty, you would want to be able to make your case to someone other than HMRC.
The previous legislation covered some of these points, but the latest does more. If HMRC were to think an adviser was dishonest, it would issue a ‘dishonest conduct’ notice. An HMRC authorised officer would need to agree this before issue.
The adviser could appeal this notice to the independent tribunal and attend the hearing to make their case in person. The onus would be on HMRC to make a case that there had been dishonest conduct.
Papers and penalties
Once any appeal has been finally resolved, and if the verdict is in the department’s favour, HMRC can apply to the tribunal to get a file access notice to look at the agent’s working papers and see if the dishonesty, which has now been established, goes across all of the agent’s work.
It is not in HMRC’s interests to ask for access to vast piles of paper without good reason and in some cases it may decide not to ask for any papers.
The agent cannot appeal this approved notice, but the tribunal will take account of any representations made either to the tribunal or to HMRC.
If a third party holds these papers, they can appeal against the notice on the grounds that producing them would be too onerous.
Once the scale of the dishonesty is clear, HMRC will assess a penalty on the dishonest agent of up to £50,000. HMRC wants to encourage disclosure by the agent so the maximum penalty will not be charged if the agent makes a full disclosure.
HMRC also intends to publish the details of agents penalised for dishonest conduct, except where there has been full disclosure.
So nothing happens until, first, agents have had a chance to defend themselves against HMRC at the tribunal and, second, the tribunal has found in favour of HMRC.
We think this will answer the big worries, but we know agents and their representative bodies will want to look at this carefully. We will be working with representative bodies and the Tribunals Service to make sure that all parties are clear about how this will work in practice.
Policy development
Practitioners might be interested in how we developed our policy, taking the definition of a tax agent as an example. We wanted the definition to encompass someone giving advice, not just those who physically sent a tax return or document to HMRC on a client’s behalf, otherwise the legislation would be ineffective.
We also had to include dishonest advice that was not given directly to the taxpayer, but came via another agent or a chain of agents who might be wholly unaware that what they were being told was dishonest.
There are a number of ways this could be done in legislation.
The first is simply to have a very wide power that catches anyone giving dishonest advice. This is the approach taken in existing tax legislation – for example in TMA 1970, s 20A, s 20D(2), s 99 and in the now repealed VATA 1994, s 60 – which tend to refer to ‘a person’ who assists in the preparation or delivery of a return, etc. It has the advantage of not requiring a definition of a tax agent; the actions themselves give rise to the penalty.
But we felt it was right to give more detail. So we developed a definition of tax agent that was narrower than ‘any person’, but which still captured the key elements and included advice, whether given directly or indirectly.
It was also explicit in that it caught dishonest advice given free of charge (which is caught by the existing law, but not explicit) and so would catch a professional accountant giving unpaid dishonest advice to companies or trusts owned by family members.
Considered changes
The above definition was the one put forward in 2010, but many practitioners thought that the definition was too wide and were concerned that, taken together with the definition of a loss of tax, it could penalise innocent advisers.
Examples given included a vicar in the pulpit wrongly advising parishioners to make gift aid donations, or radio broadcasters giving wrong advice to people with whom they had no direct relationship.
A wide definition is often the best – all encompassing, with limited borderline issues and less scope for distortion. If the test is dishonest conduct, is it not right that anyone who engages in dishonesty should be caught?
Alternatively, HMRC’s real focus is on the dishonest agent with multiple clients who can have a seriously adverse effect on the tax system. The effective use of HMRC’s resources will inevitably require concentration on the more serious cases.
HMRC’s powers review is all about examining legislation to see if it hits the mark. In this case, we now feel that we can accept a narrower definition. The aim is to deter and penalise dishonesty in most tax agents HMRC are likely to encounter.
A narrower definition could have been based on an agent who receives money or money’s worth for their advice.
In the end, we felt that a legal definition based on someone who provides advice in the course of business was the best way to express what we wanted and would be most likely to catch the people we should be catching.
Policy development is often a fine balancing act – and our latest discussion document sets out this new definition of a tax agent and asks for your views.
Conclusion
The discussion document will give more detail on what we have changed and why and shows the latest draft of the legislation. We would like to know what you think. The closing date for responses is 16 September 2011, the same date as the related consultation on HMRC’s new agent strategy.
We know that tax agents are important to the tax system. We know that they will vigorously defend their interests and those of their clients and will demand appropriate safeguards.
We also know that we must have a credible sanction to deal with the few who act dishonestly because of the effect they have on the tax system, their clients and their competitors.
The challenge is to produce something which reassures tax agents in general, and ensures that all allegations are independently judged, but that gives HMRC the tools to deal with dishonest agents.
We believe we are getting closer to this and we look forward to your views.
Simon Norris is head of review of HMRC powers
