Accountants and tax advisers are often required to interpret how tax legislation might apply in practice to a client’s circumstances. The government and HMRC have a key role to play in defining what is acceptable tax planning, and what represents tax avoidance or even evasion.
However, the lack of resources available to small accountancy practices (and accountants within the finance function) means that clarity in ethical codes and standards for accountants is important, says Ian Waters, the IFA’s director of professional standards.
“An accountant cannot simply disassociate themselves from tax evasion, as it involves the proceeds of crime – and any reasonable suspicion must be the subject of a suspicious activity report (SAR) to the National Crime Agency,” Waters explains.
Legislators have a responsibility to “narrow the ‘grey zone’ and provide clarity concerning what is legitimate tax avoidance and what is tax evasion,” he adds.
It isn’t always clear-cut, admits Chris Etherington, tax partner at RSM, but a key factor for tax professionals to keep in mind is Parliament’s original intention behind the rules it introduced, he suggests. “HMRC does not consider any tax avoidance to be acceptable and its definition includes advice which operates ‘within the letter, but not the spirit, of the law’.”
Etherington agrees with Ian Waters that it is the legislators’ responsibility to create and review tax law, and as part of that process, it is important for the intention behind the law “to be clear and drafted appropriately to prevent abuse”. It is then HMRC’s role to help enforce those rules, he says, to “protect and collect government tax revenues, and to provide guidance to taxpayers on how to interpret those rules and meet their obligations”.
PCRT: guidance to navigate any grey areas
An example of guidance that accountants and tax advisers themselves can use is Professional Conduct in Relation to Tax (PCRT). This document sets out the high ethical standards which form the core of the tripartite relationship between tax adviser, client and HMRC, Ian Waters explains.
“It seeks to address the tension experienced by accountants between helping their clients, and their broader responsibilities to society.”
IFA members can access PCRT through the institute’s webpage ‘IFA bye-laws and regulations’ (visit tinyurl.com/ifa-15001). PCRT is endorsed by HMRC and has been updated in light of concerns from the government in relation to the facilitation and promotion of tax avoidance.
Waters says: “A key message in the guidance is that members have an obligation to advise clients of the risks and implications of their actions, including reputational and practical aspects.” John Hiddleston, Azets tax advisory associate director, further explains that PCRT, which was updated to add five new standards applying from 1 March 2017, has been further updated with a new digital structure from 1 March 2019, with the present version “incorporating the same fundamental principles and guidance as the previous versions”.
However, Hiddleston adds that it also contains new ‘standards for tax planning’, which instruct professionals who are subject to PCRT that they 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. PCRT also provides guidance on th e approach advisers should take in instances where it is questionable whether the planning is contrary to Parliament’s intention, a position which Etherington says is “rare in practice”.
Other reference and guidance sources
As well as PCRT, Etherington says advisers will commonly refer to case law, journals, Hansard, explanatory notes to the legislation, and other guidance published by specialists in a particular subject matter in order to navigate any grey areas in providing tax advice.
John Hiddleston agrees that case law, as well as HMRC guidance and practice (including HMRC’s manuals and ‘spotlights’) are “also important authorities”, as well as primary and secondary legislation including the GAAR and DOTAS; reference books and commentaries such as Simon’s Taxes, Tolley, Croner-I, Bloomsbury; alongside discussions with colleagues.
Chris Etherington believes it is “usually quite clear what represents tax avoidance”.
“Often, there are clear hallmarks, like a lack of commerciality or artificial or contrived steps.”
The success of government and HMRC, he says, can be partly measured by the ‘tax gap’, which is the difference between what should theoretically be paid to HMRC and what is actually paid.
The tax gap in the year to 5 April 2020 was estimated at 5.3%, or £35bn; with avoidance representing £1.5bn. (In the year to 5 April 2006, the tax gap stood at 7.5%, with avoidance representing £4.7bn.)
While Parliament and HMRC have “taken great strides in closing down tax avoidance” in the UK, it has resulted in the UK’s tax system being one of the most complex internationally.
Etherington adds: “Every client’s circumstances are different and as a result, it’s often unclear how the rules might apply in a particular scenario, but it’s sometimes possible to obtain clarity and reach agreement with HMRC where the legal interpretation is unclear.” Failing that, he says, it can be necessary for the courts to clarify disputed questions of law between taxpayers and HMRC.
“The issues are sometimes difficult,” John Hiddleston concedes. “The FAQs in PCRT are of considerable help, but professional skill and judgement is still essential.”
Santhie Goundar is a freelance journalist
