Tax avoidance - your duties
Issued on 21 September 2017
While this warning notice does not form part of the SRA Handbook, we may have regard to it when exercising our regulatory functions.
Who is this guidance relevant to?
This guidance is relevant to all those we regulate. Solicitors and firms may be involved either directly in advising clients about tax, or handle client matters or transactions that involve them in the design, implementation, organisation or management of tax affairs, schemes or arrangements. It is therefore important that all are aware of it, particularly because the underlying approach of HM Revenue and Customs (HMRC) is changing rapidly
In the House of Lords case of Ayrshire Pullman v CIR (1929) 14TC754, Lord Clyde said that "No man in this country is under the smallest obligation, moral or other, so as to arrange his legal relations to his business or to his property as to enable the Inland Revenue to put the largest possible shovel into his stores." That approach has been rejected by Parliament by bringing in the General Anti-Abuse Rule (GAAR) 2013 legislation. GAAR is clearly explained in HMRC guidance.
Similarly, the widespread assumption that "tax avoidance is legal" no longer applies and HMRC will take action against what it refers to as "abusive tax avoidance schemes". This is explained by HMRC: "The GAAR only comes into operation when the course of action taken by the taxpayer aims to achieve a favourable tax result that Parliament did not anticipate when it introduced the tax rules in question and, critically, where that course of action cannot reasonably be regarded as reasonable."
HMRC has also indicated it might challenge arrangements not caught by GAAR: "There may be tax avoidance arrangements that are challenged by HMRC using other parts of the tax code, but if they are not abusive they are not within the scope of the GAAR."
The Government has also legislated for other anti-avoidance reform including "follower notices" and "accelerated payments" and intends to bring in a new penalty that can be applied to professionals who enable tax avoidance which HMRC later defeats. A penalty regime is already in force for those who enable offshore tax evasion or non-compliance, under s162 and Schedule 20 of the Finance Act 2016.
Law firms and solicitors must be fully familiar with these changes to ensure they comply with the SRA Principles at all times, particularly the requirement to act with integrity.
Accountancy bodies have worked with HMRC to produce a statement of Professional Conduct in Relation to Taxation (PCRT). This is published on the websites of the accountancy bodies (and is liable to change). We welcomed this statement and said that: "These standards reflect our own principles, particularly that solicitors must be honest and act with integrity, and uphold the rule of law."
Tax practitioners should therefore also be familiar with the PCRT and adhere to its standards.
We have concerns about firms facilitating tax avoidance schemes that are aggressive in ways that go beyond the intentions of Parliament.
Solicitors and firms that we regulate are in a position of trust and not only owe duties to their client but also wider duties under the SRA Principles. They have a duty to act in clients’ interests by giving sound and competent advice on the tax system while ensuring that the advice does not go beyond the proper arrangement of the clients’ affairs.
The promotion or implementation of artificial arrangements will lead both client and adviser into difficulties with HMRC and leave the adviser open to disciplinary action. The most common schemes we have seen in recent years have related to avoiding Stamp Duty Land Tax (SDLT). We will continue to scrutinise any such schemes carefully.
The High Court decided that the following allegation was proved in relation to a scheme to save SDLT:
"They involved themselves in transactions and/or facilitated, permitted or acquiesced in the promotion and/or implementation of schemes to avoid the payment of Stamp Duty Land Tax ... in circumstances where the schemes were of a dubious nature and the respondents knew, or ought to have known concerns had been raised by both HMRC and counsel in relation to the nature of the transactions..."
The High Court also commented more widely in the case:
"In my view, the evidence and the primary findings of fact of the tribunal – all eminently justified – compel a conclusion there was here a want of integrity and a failure to act with independence. They also compel a conclusion the respondents so acted as to diminish the trust the public would place in the respondents and the provision of legal services."
The tax system is a necessary part of our economic system, raising funds for public services and making for a healthy economy that serves society. Contributing to the tax system is a duty placed on members of society and solicitors and legal advisers play an important role in helping tax payers to comply with those legal obligations.
Law firms and practitioners must also act with integrity in their own dealings with HMRC. In the case of SRA v Scott it was noted by the High Court that the solicitor: "…admitted there had been financial mismanagement of his firm in breach of Principle 8 of the SRA Principles 2011, as evidenced by the firm's debt to HMRC of £232,317, which had led to the failure of the firm."
Also, a solicitor was struck off when allegations were found proved against him including: "he declared to ...HMRC... that he (together with his wife) had bought a property for a price lower than that which he paid ...resulting in him paying too little in stamp duty land tax..., and being subjected to a penalty by HMRC."
Principle 1: You must uphold the rule of law and the proper administration of justice.
You have obligations not only to clients but also to the court and to third parties with whom you have dealings on your clients' behalf.
Principle 2: You must act with integrity.
Personal integrity is central to your role as the client's trusted adviser and should characterise all your professional dealings with clients, the court, other lawyers and the public.
Principle 4: You must act in the best interests of each client.
You should always act in good faith and do your best for each of your clients.
Principle 5: You must provide a proper standard of service to your clients.
You should provide a proper standard of client care and of work. This would include exercising competence, skill and diligence, and taking into account the individual needs and circumstances of each client.
Principle 6: You must behave in a way that maintains the trust the public places in you and in the provision of legal services.
Members of the public should be able to place their trust in you. Any behaviour either within or outside your professional practice which undermines this trust damages not only you, but also the ability of the legal profession as a whole to serve society.
All outcomes in Chapter 1 will apply to your dealings with clients. In particular O(1.4) you have the resources, skills and procedures to carry out your client's instructions, O(1.5) the service you provide is competent and O(1.12) clients are in a position to make informed decisions about the services they need.
O (11.1) will also be relevant and requires that you do not take unfair advantage of third parties. This, along with the Principle to act with integrity, would require that any dealings with HMRC are conducted on an open and honest basis and that you do not seek to rely on their lack of knowledge of your client’s tax position.
When advising a client on avoidance of tax schemes you should make clear that any avoidance arrangements the client enters into might deliver tax outcomes that were never envisaged or intended by Parliament and may be challenged. You should be clear as to the legal implications, the costs and penalties of non compliance should the arrangement fail.
You should also consider your own position in advising or facilitating such an arrangement. It is likely that, should the arrangement fail, your conduct will be called into question. To be involved in such arrangements is likely to reflect badly on you and to damage public confidence in those delivering legal services. You will leave yourself open to the risk of disciplinary proceedings as well as committing a criminal offence. Where you believe, as a consequence of your client’s instructions, you are at risk then you should advise your client you cannot comply with their instructions and unless they change instructions you should terminate your retainer.
You might have clients who are using avoidance schemes. As a consequence of the Finance Act 2016, the Serial Tax Avoidance Regime came into force on 15 September 2016 and affected users of avoidance schemes from 6 April 2017. Under the regime new sanctions and penalties are imposed on those using tax avoidance schemes. Anybody using an avoidance scheme is being advised to provide information of the scheme to HMRC. For further details, see https://www.gov.uk/guidance/serial-tax-avoidance
It is for HMRC and the relevant courts and tribunals to adjudicate on the legality of tax avoidance schemes. However, where schemes are defeated and solicitors have advised on the efficacy of such schemes, we will investigate this as evidence of misconduct which may result in disciplinary action.
We will also take action where we see any lack of integrity in your dealings with HMRC, either on behalf of clients or directly.
If you require further assistance with understanding your obligations please contact the Professional Ethics Guidance Team.