The main professional accountancy and tax bodies have released a new policy document, Professional Conduct in Relation to Taxation, that will apply to their members from 1 March.
At the very least, advisers should understand the new rules of engagement accountants and other tax professionals are working with. Perhaps they should even consider adopting something similar.
The big changes relate to their approach to tax avoidance. It is all a long way removed from the famous old dictum of Lord Clyde: “No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores.
“The Inland Revenue is not slow – and quite rightly – to take every advantage which is open to it under the taxing statutes for the purpose of depleting the taxpayer’s pocket. And the taxpayer is, in like manner, entitled to be astute to prevent, so far as he honestly can, the depletion of his means by the Inland Revenue.”
This statement, made in a 1929 tax case, was displayed in the offices of many an adviser back in the day. But a great deal has changed since then.
The rot, as some might see it, first set in during the 1970s, when one of those at the top of what was then called the Inland Revenue issued a warning to the tax scheming community. The message was that if taxpayers chose to play cat and mouse, it was not incumbent on the Revenue to play the part of the mouse.
And it was roughly around that time the tax authorities started to win a series of notable cases against some of the most egregious avoidance schemes. The hallmarks of these schemes were that documents and cash circulated round a series of parties, creating legal events that purportedly ended up with a tax loss for the client. In fact, the judges found the only material transaction would have been the passing of a substantial fee from the client to the tax schemers and other players in the charade.
Encouraged by these successes, the Revenue pursued further cases and took a more assertive approach to taxpayers. Successive governments introduced more and more anti-avoidance legislation, although much of it was reactive. Each year, the tax avoidance industry came up with new schemes and each year finance acts tried to outlaw them with targeted new measures.
Governments grew wise to this and, in line with international trends, introduced more general anti-avoidance laws. These included such measures as disclosure of tax avoidance schemes and the general anti-avoidance rule.
HM Revenue & Customs has grown a lot tougher in its fight against tax avoidance, while social and political attitudes have also become less forgiving. The financial crash and its aftermath seemed to be something of a turning point. Since then, a parade of celebrities and businesses have been exposed in the media for indulging in daring tax avoidance activities.
The professional accountancy and tax bodies have officially called time on avoidance, writing it into the code that sets out standards of behaviour in relation to tax. The following extracts from the new document give a flavour of the message:
“At all times members must act lawfully and with integrity and expect the same from their clients. Tax planning should be based on a realistic assessment of the facts and on a credible view of the law. Members should draw their clients’ attention to where the law is materially uncertain, for example, because HMRC is known to take a different view of the law. Members should consider taking further advice appropriate to the risks and circumstances of the particular case, for example where litigation is likely.”
While advisers know a lot about the importance of clients’ attitude to investment risk, tax advisers have been getting to grips with clients’ attitude to tax risk and the need to explain the possible downsides of entering into schemes.
The document also says: “Tax advice must not rely for its effectiveness on HMRC having less than the relevant facts. Any disclosure must fairly represent all relevant facts.”
Some schemes relied on not drawing the tax authorities’ attention to the various arrangements, with other more legalistic details acting as a second line of defence.
Finally: “Members must not create, encourage or promote tax planning arrangements or structures that i) set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.”
In light of such a change in attitudes, Lord Clyde might be turning in his grave.
Danby Bloch is chairman at Helm Godfrey