How big a problem do they pose for the profession?
Tax is in the news. There has been a naming and shaming of companies and individuals involved in tax avoidance, from Facebook and Starbucks to politicians and others in the media spotlight.
The Treasury has also upped the ante by proposing to introduce fines for accountants or other advisers who assist clients to ‘bend the rules’ to unfairly reduce their tax liability.
Currently, about 20% of claims against accountants are attributable to tax consultancy work – a high percentage of which will relate to failed tax avoidance schemes. And we expect this to rise.
While the average cost of a claim against an accountant is in the region of £43,000 currently (according to Lockton’s statistics), tax scheme claims tend to be more expensive, when they do occur. We have seen one claim in excess of £750,000 arising from a failed film finance arrangement.
We have also seen a number of ‘block notifications’. These arise where an accountant has introduced several clients to the same scheme which subsequently fails. And remember, where a scheme fails, it is rare for the entity behind the scheme itself to still be in existence or solvent – so the risk can lie with the accountant as introducer.
It should come as no surprise that tax consultancy work is therefore a high priority issue for insurers. They are looking increasingly closely at the risk profile of firms that undertake a high percentage of tax consultancy work. Insurers that will consider underwriting this type of work at all will expect a detailed additional tax questionnaire to be completed as part of your insurance application. Premium loadings and higher excesses will apply in most instances.
The ‘defence’ that you have merely acted as an introducer, and given no advice on the schemes, is not proving to be much of a defence in reality. Much of the work now giving rise to claims is historic, and we are finding that firms’ engagement letters are frequently not sufficiently robust, where one is in place at all. Clearly, if you are providing ongoing advice in this area of practice, it is essential that you review your engagement processes and scoping letters very carefully.
You should also ensure that you follow carefully the advice that ACCA provides on tax scheme work. In fact, ACCA will shortly issue revised guidance on significant changes to ethical guidelines for members in respect of tax planning.
In summary – if you are undertaking tax scheme work, consider the following action points:
Your letter of engagement – does it have a good third party advice exclusion? Was it in place for all the introductions that you have made? Please send us a copy as this may work in your favour.
Have your clients got separate letters of engagement with the promoters?
Are any of the schemes under a Spotlight, or DOTAS registered?
Are any of the schemes being investigated or been reviewed under GAAR?
Have any clients received an APN? If so, how have they reacted?
What commissions have you received from introductions?
What is your stance on schemes now – are you actively introducing, not at all, or just on request?
Do you comply with the ACCA’s professional guidance and technical releases?
How did/ do you explain the risks to your clients? If in writing, send us a copy of what you gave to the client.
Who is the promoter? What is your relationship with them? What stance are they taking on the most recent changes? Insurers do differentiate between promoters and their schemes as to how much risk they present.
How exactly does the scheme work? Is money being invested, or is it a way of structuring assets to shelter a profit? If amounts were invested, please advise us what the figure was. If profit is sheltered, please advise us of the amount, plus the fee the client paid to the promoter.
And speak to Lockton early, to assist usto present the best possible insurance submission to the market. We can then obtain the best possible terms for your Professional Indemnity renewal.
Catherine Davis – vice president, Lockton Companies LLP
Please note that the purpose of this article is to provide a summary of our thoughts on this matter. It does not contain a full analysis of the law nor does it constitute an opinion by Lockton Companies LLP. The contents of this article should not be relied upon and you must take specific legal advice on any matter that relates to this. Lockton Companies LLP accepts no responsibility for loss occasioned to any person acting or refraining from acting as a result of the material contained in this article. No part of this article may be used, reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, reading or otherwise without the prior permission of Lockton Companies LLP.