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Christopher Lunn & Co (CLAC) is a firm of accountants in Crowborough, which specialises in clients in the film and TV industries. Taxation previously reported that HMRC raided the firm in June last year and launched a criminal investigation.
The department subsequently wrote to all the business’s clients on the matter of potential irregularities in their accounts and returns, and they were invited to make a disclosure. The deadline for doing so was originally 30 November 2010 but has since been extended to 28 February 2011, reports Mike Truman.
At the end of November, HMRC wrote to CLAC to say they were no longer prepared to deal with the firm as a tax agent. This is believed to be only the second time such a measure has been taken by the Revenue, and it is the first situation in which there had not already been a successful prosecution of the agent for a tax offence.
CLAC challenged the move by way of judicial review, and the case began yesterday afternoon (1 February) before Mr Justice Kenneth Parker, in the Royal Courts of Justice. It is expected to last until the end of today (2 February).
Counsel for CLAC started by explaining there was very little information about the status of tax agents, and all the sources to which he referred the judge were extra-statutory.
The first was HMRC’s website. He took the judge through the 64-8 process, pointing out that it was a fairly formal procedure, and that the department gives a code number to each agent. CLAC’s counsel highlighted the absence of any suggestion that the Revenue might withdraw the agent’s right to act.
Next, he referred to the National Audit Office (NAO) report of October 2010, Engaging with Tax Agents. He pointed out that the report estimated there are 43,000 firms of paid tax agents, with a market of £2.5 billion a year for the preparation of tax returns. The judge thought this represented ‘huge fees’. (The figures, in fact, work out at less than £60,000 p.a. per firm.)
Counsel for CLAC highlighted the NAO’s conclusion that good agents can have a positive impact on tax compliance and that HMRC is developing a new strategy for dealing with them.
He also drew attention, as did counsel for the taxman, to a statement that the department does not set conditions on firms or individuals wanting to work as tax agents.
Finally, he looked at internal HMRC guidance on what to do if staff members identify problems with an agent’s work. Where previously this had been dealt with on a local level, there is now a national system of reporting to ensure a consistent response in an area that was bound to be subjective.
The key area concerned refusal to deal with an agent entirely, which the guidance says should happen only when there are the most exceptional and extreme circumstances, since it can put the Revenue in a position in which human rights or data protection legislation is breached. The department therefore normally looks to mitigate problems.
Counsel for HMRC intervened to point out that the same guidance says the appointment of an agent does not remove responsibility from the customer, and that the taxman retains the right to contact the ‘customer’ directly. At this point, Mr Justice Parker expressed surprise at the term ‘customer’, asking what goods and services were received in return for their custom.
Counsel for CLAC then led the court through ‘edited highlights’ of the facts. During this exposition, the names of both HMRC staff and CLAC clients were given in court. (Taxation feels it is inappropriate to publish them because the case is not about them directly.)
In April 2009, an inspector who had reviewed investigations into around ten clients of CLAC wrote to express several areas of concern. He felt record-keeping was poor and failed to meet statutory requirements, and the clients had not been guided appropriately by their advisers.
Revenue was too frequently estimated, and expenses not wholly and exclusively incurred for business purposes. Work in progress principles were misrepresented to such an extent that they seemed to be introduced only to bring legitimacy to the accounts. There were queries about whether a trade actually existed in some cases; the tone and language of some correspondence was unacceptable.
At this point the judge stopped to ask exactly what was the point regarding work in progress; he said he found it ‘mystifying’. Counsel for CLAC said he did not understand either, but pointed out that, because of the potential criminal trial, the court had been invited – by both sides – to not enter into a discussion about the detail of the facts.
CLAC did not, at the time, respond to the HMRC letter, but a year later solicitors acting on behalf of CLAC, regarding investigations into more clients, wrote in March 2010 to the inspector.
They said there appeared to be inconsistencies in the approach to clients and there were problems with the way evidence was reviewed. The solicitors asked for a meeting to discuss issues relating to HMRC’s attitude to CLAC and to the film and TV industry in general.
The department replied in May 2010, answering some of the queries but saying that a meeting could deal only with general principles, and would therefore not be helpful.
Counsel for CLAC said he now knew what they had not known at the time: HMRC had started a criminal investigation some time in 2009, and by the time of the letters the department was considering the applications for warrants. It was therefore understandable – and counsel was making no complaint – that a meeting would not be useful.
The warrants were executed, and the search took place on 22 June 2010. Both current and archive files for all 7,000 clients were removed, along with computers and other evidence.
CLAC wrote on 1 July 2010 to ask for details of what had been in the ‘information’ put before the Crown Court to get the warrants. That was not, and still has not, been disclosed.
Conceding that un-redacted information was not disclosed, counsel for CLAC said it was not uncommon for redacted information to be shown, which explained the allegations. This is, apparently, being pursued by way of a further judicial review.
HMRC wrote to all CLAC clients the department could identify, culminating in a request in September 2010 for clients to disclose irregularities in their accounts and tax returns, and listing a number of areas of concern that included provisions being included for accountancy fees that were higher than the amounts actually charged, retrospective use of limited companies, and retrospective allocation of income and expenses between limited companies and sole traderships or partnerships. Disclosure was invited by 30 November 2010.
Acting on behalf of CLAC, McGrigors solicitors wrote to the Revenue to ask for an extension of the time limit, because some of the current files and all of the archive files for clients had still to be returned to the firm.
An extension to 28 February 2011 was agreed to in a telephone conversation on 22 November, but by then (unbeknown at the time to CLAC or their advisers) HMRC were already setting in train the procedures for withdrawing tax agent status from CLAC.
The firm’s counsel turned to interviews carried out by the Revenue’s criminal investigation team with the senior partner of CLAC and his son. Counsel’s intention was to make the short point that only half a dozen clients’ affairs were referred to during the questioning: an extremely small percentage of the 7,000 for whom clients acted.
However, both people questioned refused, on legal advice, to answer the questions put to them. This revelation led to a long exchange between the counsel and Mr Justice Parker.
According to the judge, the firm’s whole case was that they were not given an opportunity to make representations. He queried why, in that case, no answer had been given when questions were put.
The documents to which the counsel referred to at the beginning of the argument had established that agents were in a position of trust and, once a prima facie case had been made against CLAC (which counsel had already accepted he could not dispute), that trust had gone.
HMRC wanted an explanation, and in particular – as the judge understood it – they put great weight on the manipulation of accountancy fees. There was an over-provision, which was not corrected in following years. The Revenue’s allegation was that this was a systemic issue; indeed, that it was a way of recruiting clients, on the basis that tax saved by over-provision would pay the fees actually charged. This was a very serious allegation, which, on the face of it, looked bad.
Counsel for CLAC countered the view in two main ways. The first was to say there was a significant difference between answering questions posed in a criminal investigation and the right to make representations as to whether status as agents should be terminated.
It was a standard response to refuse to answer questions at this stage, when it was not even clear that a prosecution would follow, and the two men had not received prosecution evidence.
Second, the representations that might have been made in respect of the termination of agent status, had the opportunity been given, could have included a plea to be suspended rather than terminated, to withdraw themselves rather than have HMRC do it, or to withdraw from acting in certain circumstances.
This in turn depended on what counsel for CLAC alleged was the Revenue’s real reason for wanting to terminate the firm’s status as an agent, to which the case then turned.
The decision to terminate agent status was taken by a meeting of the Commissioners for Revenue and Customs on 25 November. It considered a report and recommendations prepared by those undertaking the criminal investigation, but with a further appendix of material arising from the civil investigation into the affairs of the clients.
The major concern of the leadership of the criminal investigation was the legal difficulties involved in running civil and criminal investigation streams alongside each other. They had concluded this would mean giving a formal caution to any employee of CLAC who turned up to represent a taxpayer during a civil investigation: a situation that was plainly untenable.
There were, therefore, two possible solutions considered by the commissioners. The first, proposed by those responsible for the criminal investigation, was that HMRC should refuse to deal with CLAC as an agent in respect of accounts or returns submitted before the raid on 22 June.
The second posited solution was a blanket refusal to deal with CLAC as an agent at all.
In support of the first option, the criminal investigation side said there was no evidence that any unacceptable practices had continued past 22 June. Although this involved a risk, HMRC’s policy was to terminate an agent’s status only in the most exceptional circumstances.
While the appendix from the civil investigation did not, in counsel’s view, go beyond this, it did raise the issue that clients who had telephoned in were in a quandary, were looking for advice, that the editor of Taxation had become involved (correct), and that new agents needed to be appointed.
The commissioners decided they would take the other option: a blanket ban on dealing with CLAC as an agent. After a long discussion, and after taking legal advice, they felt this was the right decision because otherwise, given the amount of evidence of irregularities so far obtained, customers might continue to have incorrect returns submitted.
This, counsel for CLAC argued, ignored the view of the criminal investigation that there was ‘not a shred of evidence’ that irregularities had continued after 22 June.
The final question for the commissioners was whether to impose the ban immediately – and tell CLAC’s clients – and then invite representations afterwards, or to invite representations from CLAC prior to making a ban.
They chose to make the ban immediate because the January deadline for tax returns would otherwise mean many more clients would file returns through CLAC.
Counsel for the firm said this did not give consideration to what would happen if the representations made subsequently were successful in getting HMRC to overturn their ban, since by then clients would have appointed new agents.
It also did not make sense, since the letters were only sent out to clients at the start of December, because it left insufficient time for new agents to be appointed and returns submitted by 31 Jan.
In relation to the representations that would have been made, counsel for CLAC reiterated the point that the judge’s concerns about the prima facie case against the firm were not the real reason for the termination of agent status.
This had arisen from the concern about running the twin tracks of a criminal and civil prosecution. Given the opportunity to do so, CLAC might have suggested that it withdraw from dealing with any case in which HMRC wanted to interview a client.
If the real reason for the Revenue’s concern was the level of irregularity found, it should have proposed terminating CLAC’s agent status after the raid or after the first disclosures had come in during September and October. That would have given time – 28 days were suggested – for the firm to make representations in advance of a ban coming into effect.
Summing up the argument so far, the judge said CLAC’s case was that had it been given the opportunity to make representations in advance of the decision to terminate, it could have made suggestions that were ‘not futile’.
Counsel for the firm agreed. He explained that the remainder of his case would involve an explanation of the law (which was not expected to be controversial) and his exposition of how it applied to the facts he had already established.
Since that would have taken the court past the time it would normally sit, the judge adjourned the case until today, when it is expected to conclude.
