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KEY POINTS
- The Forum on Tax Administration needs to understand the issues faced by many tax advisers.
- Tax authorities and tax advisers have to acknowledge their own priorities.
- What role should tax authorities take in monitoring tax advisers' work?
- This is an interesting initiative but it needs to progress with caution.
I still remember my first driving lesson. The last time I saw my old driving instructor, Jim, he said that he still remembered it too. Although I had quickly discovered what to do with the accelerator (and indeed the brake), steering had proved more troublesome. One half of the road was not enough. The trick, Jim had said to me, was to look well ahead. Implementing this advice proved to be better news for oncoming vehicles than for wildlife emerging from Somerset hedgerows. By the end of the lesson I had learned the importance of dividing my attention between the road immediately in front of me and the road well ahead. The result: an improvement in wildlife mortality, fewer oncoming vehicles swerving wildly, and a marked improvement in Jim's language.
What has this to do with tax? Well, back in July, the speakers at the Tax Faculty's Wyman Symposium 'Accountants and Intermediaries: in the way or the only way to a more efficient tax system?' analysed the current and likely future relationship between HMRC and the profession. Afterwards, someone said to me that it would have been better to focus entirely on current service delivery issues, but there is something heading down the road towards us that we cannot ignore: the Seoul Intermediaries Project. If you have never heard of it, or think that it is just an academic exercise that will not affect the average practitioner, read on.
Some history
In September 2006, senior representatives of 35 revenue bodies met in Seoul under the auspices of the Forum on Tax Administration. The forum has the aim of 'promoting dialogue between tax administrations and identifying good tax administration practices'. At the meeting, HMRC agreed to lead a project to examine 'the role of tax intermediaries, e.g. law and accounting firms, other tax advisers and financial institutions, in relation to non-compliance and the promotion of unacceptable tax minimisation arrangements'. This was subsequently changed to 'the role of tax intermediaries within tax systems, including in relation to unacceptable tax minimisation arrangements'.
The project team has produced six working papers and two themes have dominated: risk management and the potential for an 'enhanced relationship' between tax administrations and taxpayers, and between tax administrations and tax intermediaries. Why are these themes of interest to tax authorities? Because, as the declaration noted, virtually every tax authority in the world is under pressure to close the tax gap, i.e. the difference between the tax legally due and the amount actually collected, while at the same time being asked by governments 'to do more with less'.
One way of doing more with less is to move from labour intensive means of contact to a less personal 'channel strategy' embracing call centres and electronic filing. This, however, will only partly solve the problem and the intermediaries' project team believe that an increased focus on risk management and an 'enhanced relationship' represent further partial solutions.
The intermediaries' project is international but, as HMRC are leading, it seems reasonable to assume that the working papers reflect thinking at 100 Parliament Street. This is why we need to engage, as the Tax Faculty has, with the project team and why I think you should read on.
Tax advisers
The team has moved a long way from the negative view of intermediaries expressed in the original Seoul Declaration. Working Paper 5 'Risk Management' says:
'The study team believes that the impact tax advisers have is largely positive ...'
This is a welcome statement and I would like to think that part of the journey back from Seoul to London was via the road to Damascus, but the paper goes on to say:
'By supporting and influencing one tax adviser, a revenue body can support and influence the behaviour of many taxpayers … the actions of tax advisers can also influence their clients in ways that increase the risks revenue bodies perceive in their clients.'
I have read and reread these words. They reinforce the need for the project team to understand the ethical and practical issues faced by tax advisers, certainly those of us who are members of professional bodies. The Confédération Fiscale Européenne (CFE) in its submission, to which the Tax Faculty contributed, set out these issues very clearly:
'… the bedrock of self-assessment systems of taxation is that the taxpayer takes responsibility for their tax returns. Any proposal to impose an onus on a tax adviser to audit the facts as presented by clients or to shift some of this self-assessment burden to them takes the focus off the taxpayer and increases costs and compliance burdens ... Notwithstanding this … if a particular item of information seems peculiar, there is a justifiable expectation that a tax adviser will seek clarification of the item ...
'There is certainly a professional understanding that a tax adviser will not misrepresent facts to a revenue authority or any other stakeholder. This is an integral part of the codes of conduct by which tax advisers operate ...
'… tax advisers must operate within the confines of the law while the client is responsible for presenting the facts of a situation to the adviser. This rule of law cannot be based on how the adviser thinks the law will be interpreted by a revenue authority. A transaction is either legal or it is not and it is the rule of law that decides this.'
These basic propositions underpin our ethical rules and our contractual obligations to our clients. I am to some extent reassured that later in the paper the following words appear in the context of the 'enhanced relationship', of which more later:
'Tax officials work opposite tax advisers who are professionally required to act as zealous advocates for their client's interests … The study group acknowledges that tax advisers have a professional obligation to act solely in their client's interests; and that, in doing so, they play a necessary and meritorious role in the process of tax compliance.'
So where is all this leading?
An enhanced relationship
Working Paper 6 is titled 'The Enhanced Relationship'.
The team has held informal discussions with various groups including the Tax Faculty. There is a general consensus that all parties want to ensure that the right amount of tax is paid at the right time, that this should be achieved efficiently, with minimal enquiries and a clear focus on significant issues and that there should be certainty of outcome in complex areas. To achieve this, the project team feels that there has to be 'an open and honest dialogue based on mutually understood and appropriate levels of disclosure and transparency'. They envisage an 'enhanced relationship' built on trust and which 'goes beyond legal obligations'.
Certain elements are identified as being necessary, particularly a willingness on the part of taxpayers and tax advisers to be transparent in their dealings with the tax authority and a willingness on the part of the tax authority to adopt an impartial approach to dispute resolution. The latter is characterised as 'an institutional attitude that approaches dispute resolution solely by reference to: (a) the merits of the case: and (b) reasonable legal positions that reflect what the tax law actually says, rather than what the revenue body would like it to say'. There is even an acknowledgement that 'the meaning of the “right” amount of tax is often difficult to determine'.
The team concludes that:
'The impartial approach may be seen by revenue bodies as a radical transformational change in the way they go about doing business and resolving tax disputes. The main quid pro quo being asked of taxpayers and their advisers — openness through full disclosure and transparency — is likely to be viewed by them as equally radical. That is why the enhanced relationship presents both enormous challenges and profound opportunities for meaningfully changing the tripartite relationship.'
What are the 'profound opportunities' for tax advisers and taxpayers? The working paper says:
'taxpayers who behave transparently and who do not have higher risk tax issues can reasonably expect support and lower compliance costs … [and] … it should therefore be for the benefit of the large majority of taxpayers whose activities and behaviours do not fall into a high risk area to help revenue bodies to become better at risk assessment … and hence better at minimising those taxpayers' compliance costs.'
There may indeed be something there, but only if our duty to our clients is understood to be as sacrosanct as a tax authority's duty to enforce the fiscal policies of government.
Risk management
Working Paper 5 'Risk Management' takes a different, but linked, tack and looks at how tax authorities might reduce the tax gap by managing risk. The purpose is stated to be to:
'release and reallocate resources to the two main areas of concern the study has identified … tax planning involving a tax position that is tenable but has unintended and unexpected tax revenue consequences … [and] … taking a tax position that is favourable to the taxpayer without openly disclosing that uncertainty remains whether it accords with the law.'
The team suggests that risk management should encompass consideration of the taxpayer's commercial structure, size and activities, the taxpayer's people, processes and accounting systems, the taxpayer's behaviour and the extent to which it is known to agree the tax authority's interpretation of the law. It then goes on to look at the idea of risk assessing tax advisers, noting that 'few countries systematically evaluate, much less manage, the impact tax advisers have on the risks their clients represent'. Australia does risk assess tax advisers and South Africa may soon follow; in Ireland, advisers to large businesses and high net worth individuals are risk assessed. In direct reference to the UK, they say:
'As part of HMRC's plans to deliver a better service for business, HMRC intend to enhance services for agents, building and maintaining a positive relationship with the agent community based on professionalism, trust and delivery of services, so that they can better support their clients and enable HMRC to target their activities more accurately on higher-risk areas.'
I applaud the aspiration but, viewed from where we are today, there is quite a hill to climb. The working paper goes further:
'HMRC intend to develop a better understanding of agents' pre return processes and how these might provide assurance about the return … qualified tax advisers are usually regulated by professional bodies; and … individuals working within firms are regulated by their firms as well as by the professional bodies and bound by strong codes of behaviour and ethics … an option to take this forward cautiously would be for revenue bodies to work with professional bodies to create generic risk profiles for tax advisers, based on the sectors of the market that they serve. Revenue bodies and professional bodies and/or firms could subsequently use the generic profiles to agree profiles at a more detailed level by identifying exceptions and building separate profiles for those firms or individuals that did not fit the generic profile.'
I am relieved to see the word 'cautiously'.
In Working Paper 6, the team says that: 'there could be direct dialogue between revenue bodies and (i) the larger firms of tax advisers, (ii) others where there are particular reasons, such as a specialised tax practice area of particular interest to the revenue body, and (iii) professional associations representing the remainder'.
I can see that it would be relatively easy in principle for HMRC to engage with large firms whose internal procedures will be consistent across different offices but smaller firms use a wide variety of quality control procedures which vary from firm to firm. The temptation must be to ask the professional bodies to monitor the quality of members' tax work, the mechanics of which could be a bureaucratic nightmare. Proceeding at anything other than a very cautious speed along this part of the road would be ill advised, as the Tax Faculty has said in its recent submission published as TAXREP 62/07. I seem to hear my driving instructor's voice saying 'the amber light is a signal to move your foot to the brake — and that's the one to the left of the accelerator my boy'.
Proceed with caution
While Jim is still in my mind, I am reminded of another driving lesson. Jim was eating an enormous sandwich which seemed to require his full attention. There was a lorry ahead, a straight road and the accelerator beckoned. I put my foot to the floor and began to overtake. It was then that I realised that lorries had accelerators too. Half way alongside I saw an even larger lorry coming the other way. Jim munched on. After what seemed an age I squeaked in front of the first lorry. Nothing was said until we reached home. 'I doubt that we'll be doing that again,' said Jim, adding 'ten quid please, which will just about pay for my next bottle of nerve tablets'.
The moral of this story? There is a road to travel here but it has to be travelled with caution and at a sensible speed. Hitting the accelerator to produce anything other than an interim report for the Forum on Tax Administration's meeting in South Africa next January would risk wasting an opportunity. It certainly would not meet with Jim's approval. There is a lot more talking, and thinking, to be done and it must not be rushed.
Paul Aplin is chairman of the ICAEW Tax Faculty and a tax partner with A C Mole & Sons. He can be contacted via email at paulaplin@acmole.co.uk. The views expressed in this article are his own and not necessarily those of the ICAEW or his firm.
