HM Revenue & Customs (HMRC) is planning a set of draconian new powers to use against tax advisers in its consultation: "Working with Tax Agents: the Next Stage". A more accurate title would be "Working against tax agents..."
Tax agents man the front line in tax compliance. HMRC has noted that this system is not perfect; there are occasions where performance of the minority of tax agents falls below the standard it expects from its delegated police force. HMRC is not able to quantify the effect that this has on its revenue, nor provide number of agents involved, yet it still believes that it needs a draconian new set of powers to combat tax agents.
HMRC’s latest proposals are aired in a new consultation “Working with Tax Agents: The Next Stage” (published with the Pre-Budget Report). The objective is to provide it with a fast track method of raising revenue through non-tax and tax-geared penalties. It will be able to penalise a wide range of people beyond those who are normally regarded as tax agents when it suspects them of a fraud-like offence which requires less than the current standards of evidence to secure a conviction. In some cases agents will have no rights to represent themselves.
The first draft of this was the consultation document “Working with Tax Agents” which was published in April 2009. It considered the scope for penalising agents for poor performance and reporting them to their professional bodies as well as suggesting an agent registration process, perhaps defining the term “tax agent” in law, and using models from other countries, notably the USA and Australia. These ideas met with a mixed response; how could HMRC criticise agents of bad work when its own standards are so poor? Why too should HMRC need more new powers when it has plainly not been using the ones that Parliament has already given it?
A summary of the responses to that consultation were published with this installment. Many of the earlier ideas appear to have been dropped (for now); the proposals narrow down to three main areas.
- A revised procedure for disclosure to the professional bodies in the case of misconduct.
- New legislation to tackle deliberate wrongdoing by tax agents.
- New legislation to tackle "high volume" agents.
In each area, the response will depend on the agent’s action as follows:
Correction – no other action taken
Failing to take reasonable care
Discuss with agent
If unresolved, report to professional body, if unaffiliated, new civil sanction (tax penalty)
Consider criminal proceedings
If not appropriate, new civil sanction (tax penalty)
Who is an agent?
HMRC’s proposal is that this should be a very wide definition and not limited to those who are appointed on a form 64-8. This brings into the net anyone who acts for a taxpayer in relation to his tax affairs whether directly or not. The term agent will therefore extend to include bookkeepers, accountants, auditors, valuers, land and shipping agents, stock-checkers, as well as lawyers.
An agent is for these proposals an individual, not his firm. This could result in some extraordinary consequences where the existing agent is a company and some or perhaps all of its employees can be agents. Where the existing agent is an LLP, the partners and employees may all be agents, depending on what work they do for the client.
Failing to take reasonable care
If HMRC decides that an agent has been making errors which indicate that the agent is not taking reasonable care it intends that it will firstly engage with the agent to resolve the issue. If the agent is unwilling to resolve matters it will consider disclosure to its professional body or penalties.
Disclosure to professional bodies
HMRC now accepts that it needs no new powers in this instance as it can work within the ambit of its existing statutory authority under section 20(3) of the 2005 Commissioners for Revenue and Customs Act (CRCA). This allows it to disclose details of a member to his professional body if that member is guilty of misconduct in relation to HMRC. Practically this gives HMRC the satisfaction of “naming and shaming” a professional whose word does not come up to scratch; he is then left to the mercy of his professional body’s disciplinary proceedings. A further safeguard for the tax agent is the proviso that a Tribunal must confirm that this is in the public interest.
Disclosure: unregulated tax agents
An unaffiliated or unregulated tax agent cannot be reported to a professional body. So HMRC suggests that it should impose a new civil sanction, by which it means a penalty, when it cannot resolve the problem directly with the agent concerned. No exact details are given, but we presume that these will be similar to the ones below. This will clearly be something of a major issue for unaffiliated agents, a group which includes a fair number of ex-Revenue officers as well as ex-members of professional bodies.
Deliberate wrongdoing by a tax agent.
Deliberate wrongdoing is better known as fraud or tax evasion. HMRC guidance now describes this as “knowingly and intentionally” wrong and involving tax being understated, over-claimed, or otherwise not paid when correctly due.
Only a “very small number of tax agents” are considered to be engaged in deliberate wrongdoing, according to HMRC which already has wide-ranging powers to seek criminal prosecution in these cases, with the backing of proceeds of crime sanctions. Yet despite the very small numbers involved it says that it is too expensive to try and secure a criminal conviction in many cases. This is presumably because it can be difficult for it to provide evidence to meet the required level of proof in criminal proceedings, and court proceedings are expensive. HMRC proposals are that it will be more cost effective for it to abandon any pretence of allowing anyone it suspects a fair trial, it wants to create a new system of civil sanctions instead.
HMRC’s proposals for new civil sanctions
It is unclear what criteria HMRC will use to decide whether a case is suitable for civil or criminal proceedings other than cost alone.
When an agent is suspected of deliberate wrongdoing, which is likely to lead to loss of tax, HMRC wants:
- Unfettered access to tax agent’s working papers, for all its clients.
- A new system to penalise the tax agent.
- To publish tax agent’s name
At this stage we have to ask ourselves what proof is required on HMRC’s part to establish evidence of deliberate wrongdoing. It is essential to collar the right person after all.
First off, it will need to work out who it actually suspects. This could be one or more, or all out of:
- The regular tax agent,
- Any number of deemed agents (for the purpose of these rules) or,
- The client
Will there be a tie-breaker when no one owns up? What happens if everyone blames everyone else? You can imagine what might happen: “He said this then she said that.” There will not always be a paper trail like there is in the movies, and it seems that HMRC will play judge and jury. You could end up with a who-dunnit: “I suspect… the auditor, in the stockroom, with a blackberry…”
Inspection of all the agents working papers
HMRC proposes that when it wants the power to inspect all the agent’s papers it will make an informal request at first. If this fails then a senior officer will have to agree to a request for a notice of inspection from the Tribunal. The agent will be allowed to be present at this hearing, unless HMRC needs “to protect the source of its information” in which case it will be ex parte.
It seems that the agent then has no safeguard under this system. He is treated as guilty from the outset and then is unable to conduct any form of defence by virtue of an unknown source.
HMRC says that its existing powers in Section 20A TMA are limited, because it cannot access working papers until it has changed a penalty under section 99, or the agent has been convicted of a criminal offence. It seems that it is deliberately downplaying its new powers: it can access most records using Schedule 36 of the 2008 Finance Act. Although there protection is given to legally privileged documents and tax adviser’s papers giving tax advice. It can certainly access all the working papers relevant to the accounts and tax computations.
HMRC is also looking for new powers to cover notices to third parties.
New civil penalties
“It seems right” according to the consultation document that new civil penalties for agents should be tax geared based on Schedule 24 of the 2007 Finance Act. This appears to be an attempt to shoe horn these proposals into the existing regime, however, while a taxpayer who understates his tax liability saves tax, his agent does not. HMRC argues that if a fixed one-off penalty applies then a large-scale evasion involving just one client will attract a lower level of penalty than a smaller loss relating to many clients. To this end it favours a tax geared penalty set with a minimum level of £5,000 and a maximum of £50,000.
Agents will receive a discount for the quality of their disclosures, again based on the Schedule 24 qualities of “telling”, “helping”, and “allowing access” to their files, although there will be discount for an unprompted disclosure. The result may be penalties that are more than double your average bookkeeper’s wage. Has HMRC lost all sense of proportion?
Deliberate wrongdoing: publishing the name of the tax agent
A further proposal is intended to piggy back onto the provision in section 94 of the 2009 Finance Act that allows publication of the name of a tax defaulter where the potential lost revenue exceeds £25,000.
High volume agents
HMRC does not have the resources to deal with claims and repayments made on an “industrial scale” by a small number of agents. So the proposal is that if it cannot resolve a problem with an individual agent by using Schedule 36 FA 2008 it should have new powers to press the agent to substantiate each claim, and withhold repayments if the agent does not comply (sanctioned by the Tribunal, the agent is not allowed to attend the hearing). We are not told how HMRC would check claims thereafter, because this appears to be a resource issue for HMRC. Many claims doubtless relate to the millions of errors created by HMRC’s PAYE system in recent years. There seem to be no safeguards proposed to ensure no hardship for genuine cases caught in the net.
HMRC wants a blunt tool in order to avoid paying court costs and this signals a dark age in terms of HMRC/agent relations. Some of the professional bodies were disturbingly low key in relation to the first consultation. I wonder if they will now back-up the CIOT and ATT and have a long and hard think about the potential affect a careless accusation of fraud could have on their members?
You have until 3 March 2010 to respond to this consultation. Please do.
The article is an abridged version "Pass the sledge hammerwhich" by Nichola Ross Martin and published in Tax Adviser Magazine in January 2010. The magazine is the journal of the leading bodies of tax advisers the CIOT and ATT.
Nichola Ross Martin sits on the ATT technical committee and is responding to the consultation with the committee.