When HMRC Comes After the Adviser

Most advisers think their exposure in a tax dispute is a negligence claim and an awkward call with their institute. There are five routes, four of them HMRC’s, and only one of them requires dishonesty. The enablers penalty needs none at all, and it is measured by your fees, not by the tax.

The Five Ways HMRC Can Come After an Adviser

Most advisers assume their exposure in a tax dispute is limited to a professional negligence claim from the client and, at worst, an awkward conversation with their institute. In fact there are five distinct routes, four of them running directly from HMRC, and they have different tests, different evidence and very different consequences.

Schedule 38: Dishonest Conduct by Tax Agents

Schedule 38 to the Finance Act 2012 came into force on 1 April 2013. It gives HMRC a self-contained regime for dealing with agents it considers have acted dishonestly, without needing to prosecute.

The test

An individual engages in dishonest conduct if, in the course of acting as a tax agent, the individual does something dishonest with a view to bringing about a loss of tax revenue. Two points follow immediately from the statutory language:

• No loss need actually occur. It does not matter whether a loss of tax was in fact brought about.
• Client instructions are no defence. It does not matter that the individual was acting on a client’s instructions.

“Tax agent” is defined broadly. It is not confined to regulated professionals, and it can capture unqualified advisers, bookkeepers and anyone assisting clients with their tax affairs.

The machinery

1. Conduct notice. HMRC determines that the individual has engaged in dishonest conduct and issues a notice. The determination is appealable.
2. File access notice. HMRC may require the agent (or a third party holding the papers, such as a firm or a successor practice) to produce the agent’s working papers. Approval of the tribunal is required in defined circumstances, and there are protections for privileged material.
3. Penalty. A penalty may be imposed for the dishonest conduct itself. The statutory range runs from a floor to a substantially higher ceiling, with the amount reflecting the quality of any disclosure and the seriousness of the conduct. Separate penalties apply for failure to comply with a file access notice.
4. Publication. Where the penalty exceeds a statutory threshold, HMRC may publish the individual’s details. For a practising adviser this is usually the most damaging consequence of all.

The working papers problem

A file access notice is the part of the regime that causes most practical difficulty, because it reaches material the adviser regards as their own:

• It can be served on the agent, on the firm, or on a third party who holds the papers.
• It reaches working papers relating to the client’s tax affairs, which in practice means file notes, correspondence, computations and internal reasoning.
• Legal professional privilege protects only what it protects, and advice from accountants does not attract legal advice privilege at all, following R (Prudential) v Special Commissioner [2013] UKSC 1.

That last point deserves emphasis. An accountancy firm’s file notes are not privileged, however legal their content. Where a matter is serious enough that privilege may be needed, the answer is to instruct lawyers, and to do so before the difficult documents are created. See our analysis of Three Rivers (No 6).

Money Laundering Supervision

Accountancy and tax firms are supervised for anti-money laundering purposes either by a professional body or, for firms not covered by one, by HMRC. Supervision brings a distinct set of obligations and a distinct set of sanctions.

• Registration. Firms in the supervised sector must be registered with the appropriate supervisor. Trading while unregistered is itself a breach.
• Core obligations. A firm-wide risk assessment; policies, controls and procedures; customer due diligence and enhanced due diligence for higher-risk relationships; ongoing monitoring; record keeping; training; and the appointment of a nominated officer.
• Reporting. Suspicious activity reports where there is knowledge or suspicion of money laundering, together with the offences of failure to disclose and of tipping off.
• Sanctions. Censure, financial penalties, conditions on registration, prohibition of individuals, and publication of enforcement action. HMRC publishes details of businesses penalised for breaches.

Professional Bodies and PCRT

Members of the main accountancy and tax bodies are bound by Professional Conduct in Relation to Taxation, which sets standards for tax planning and for dealings with HMRC. It requires, among other things, that members do not create, encourage or promote arrangements that set out to achieve results contrary to the clear intention of Parliament, or that are highly artificial.

PCRT matters in three practical ways:

• It is evidence of the standard expected, and departure from it is visible in any subsequent examination, whether by HMRC, by the institute, or in a negligence claim.
• It informs the reasonable care defence under the enablers regime.
• It governs what a member must do when they discover a client’s irregularity, including the obligation to advise disclosure and to consider resigning where the client refuses.

The Client-Side Claim

Separately from anything HMRC does, an adviser faces exposure to the client. The elements are the familiar ones: a duty of care, breach, causation and loss, with the special relationship analysis from Hedley Byrne v Heller underpinning liability for negligent advice.

Two features recur in tax negligence claims:

• Scope of duty. What the adviser was actually retained to do is decisive, and engagement letters are the first document disclosed. An adviser who was not engaged to advise on a structure is in a materially better position than one who was silent about a risk within their retainer.
• Loss. Tax that was always properly due is generally not a recoverable loss. What is recoverable is usually penalties, interest, professional costs and, where relevant, the cost of a worse outcome than would have been achieved with proper advice.

The Katib point is worth noting from the other side of the desk: in HMRC v Katib the Upper Tribunal reasoned that adviser failures are attributed to the client precisely because the client has a remedy against the adviser. The tribunal’s refusal to excuse the client is, in effect, a signpost to the negligence claim.

What Firms Should Actually Do

Prevention

• Scope engagements precisely and in writing. Record what is and is not within the retainer, and where the client has taken advice elsewhere.
• Keep contemporaneous file notes of advice and of warnings given. The reasonable care defence under the enablers regime, and the defence to a negligence claim, are both evidential.
• Be careful with introductions. Introducing a client to a promoter can amount to enabling. Document what was said and what checks were made.
• Keep the firm’s own anti-money laundering file current: risk assessment, customer due diligence, monitoring evidence, training records.
• Have a protocol for discovering a client irregularity, covering advice to disclose, the suspicious activity report question, and resignation.
• Instruct lawyers early where the matter may become serious. Accountants’ papers are not privileged.

If HMRC makes contact about your conduct

• Establish which regime is in play: sanctionable conduct, enablers, POTAS, or an ordinary enquiry into a client. The rights and risks differ entirely.
• Take independent advice immediately, and not from within the firm.
• Notify insurers. Late notification is a common route to losing cover.
• Do not simply hand over the file. Check whether a valid notice has been given, what it actually requires, whether tribunal approval was needed, and whether any material is privileged or belongs to the client rather than the firm.
• Consider the client relationship and any conflict at the outset. The firm’s interests and the client’s may diverge quickly.
• Address publication. Where publication is in prospect, that is usually the consequence worth fighting hardest, and it is a separate argument from the penalty itself.

Frequently Asked Questions