Comments from ACCA to HM Revenue and Customs (HMRC), February 2010.
ACCA is pleased to comment on the above consultation. We welcome the paper Working with Tax Agents: The Next Stage which builds upon the ongoing work undertaken by the professional bodies and HMRC. ACCA continues to support and play an active role in the development of HMRC's work with tax agents.
While improvements and further development are required we applaud the aim of this consultation. The proposals for disclosure to professional bodies are balanced and constructive and have clearly taken account of the previous responses to the consultation.
We cannot however extend the same warm welcome to the proposals for access to tax agents' working papers or behavioural penalties for tax agents. We are concerned that the proposals are too closely focused on cost reduction for HMRC at the expense of due process and tax payer, or agent, protection. The burden of complying with a demand for working papers under the proposed regime would prevent most practices from operating whilst under investigation by HMRC. Whether guilty or not, they would effectively be punished merely for being suspected by HMRC of undesirable behaviour. ACCA will comment in detail separately on the clauses of the draft legislation in respect of this area.
The proposals for High Volume Agents appear reasonable enough as a response to the perceived problem, but there is a lack of safeguards for innocent tax payers caught up in the process. We would expect to see details of such safeguards included within the draft legislation which has been promised on this area.
While there is much to be encouraged by in the continuing consultation process, we are concerned that in certain aspects of this paper HMRC seem to be calling for draconian powers to address what is, by their own admission, a tiny minority of Tax Agents' behaviour. It is difficult to accept a call for such an extension of HMRC's powers at a time when the relationship between HMRC and the profession is so delicate. The trust between the two parties which must underpin a successful working relationship will be better bolstered by a constructive and proactive attitude to working with existing powers (as in the disclosure proposals) than by calls for an increase in discretionary powers when those already available are so underused.
1. Would greater disclosure to professional bodies with a regulatory function be a proportionate way to achieve HMRC's policy aim?
ACCA would welcome the introduction of a two way process whereby examples of failings both on the part of Tax Agents and HMRC officers could be shared and action taken accordingly to remedy the failings. Past experience has indicated that where such a process is available most examples of such failings can in fact be resolved without recourse to formal procedures. Whilst the outputs of such a system may not be readily measurable and quantifiable, the intangible benefits to all parties of a constructive dialogue on standards of work must not be ignored.
We note also that the success of such a framework will be dependent upon the attitude of those subject to the regime and an awareness in their minds of the potential routes for escalation of the complaint and the final sanctions available. There may also be a number of agents who, following disclosure by HMRC and ultimately expulsion from their regulatory body would continue to provide services as a Tax Agent.
2. Are there any further safeguards that have not been identified?
HMRC's proactive approach on this occasion to creating a solution within the existing statutory framework, without the need for further legislation or complexity, is appreciated. However, we are concerned that the mechanism used (expansion of the situations to which particular provisions apply by redefining terms within the legislation) could if applied to legislation generally lead to considerable uncertainty and potential injustice. We would like to see HMRC clarify the circumstances in which they would seek to expand the scope of existing legislation in this way, and in this particular example would suggest that a statement from HMRC on the precise scope of 'misconduct' in this context would serve to alleviate the fears of the profession.
3. Are there circumstances where HMRC should make a disclosure to a professional body directly, without first seeking to resolve the issue with the tax agent?
The only circumstance where ACCA considers such a course might be appropriate is where HMRC wish to avoid 'tipping off' the Tax Agent concerned. If the level of 'frequent error and unethical behaviour' is so great HMRC believe an informal approach is doomed to failure, there must be an assumption that this is because the behaviour itself is deliberate, and therefore would properly fall not within the misconduct provisions, but within deliberate wrongdoing.
4. Are there issues concerning the interests of clients and employees of a tax agent or firm of tax agents that need to be reflected?
In general, we believe that the raising of standards across the profession should be welcomed by clients and practitioners alike, whether directly affected by the proposed new approach or not. Although we would point out, as we have during meetings and workshops, ACCA members already operate to exacting standards.
ACCA believes that in all cases where HMRC identifies issues of misconduct relating to a firm or large undertaking it is essential that the root cause (individual behaviour or systemic failings) is identified and a resolution of the issues pursued accordingly. Whatever the cause of the misconduct, the issues should be discussed with the management of the undertaking as well as any individuals directly concerned.
In a case of individual misconduct, it is likely that the first avenue of escalation should be to raise the misconduct with the individual's employer or partners. If internal procedures at the firm do not resolve the issue, then HMRC's communication with the professional body would need to be undertaken in a constructive manner which does not unfairly damage the reputation of an undertaking with its regulatory body (although we acknowledge that the inability to resolve such issues to the satisfaction of all parties is likely in itself to be an indicator of potential concerns).
In situations where either a regulated individual is working within an unregulated undertaking, or an unregulated individual is working within a regulated body care needs to be taken that disclosure is sufficiently clear and detailed that the regulatory body can clearly identify the issues raised by HMRC and the subject of HMRC's concerns. Failure to establish the subject matter of a disclosure could unfairly prejudice the reputation of regulated individuals and firms, and involve the regulatory bodies in unnecessary investigations.
While this is touched upon at 4.28, no questions are then asked. As HMRC know ACCA is concerned about the high level of burden which our members and those of other professional bodies carry over and above that of the unregulated. HMRC is already aware of CPD and monitoring obligations of ACCA members as well as our willingness to work with HMRC in order to disseminate training material and guidance. We therefore would expect HMRC to formally acknowledge this in the final framework and in practice to operate with a lighter touch when dealing with the regulated profession.
ACCA notes from the Introduction to the Draft Legislation that HMRC wishes to consider 'financial penalties or other sanctions for behaviour…that is not deliberate, particularly in cases where the disclosure option is not available', that is, unregulated tax agents. ACCA does not believe that financial penalties are an appropriate tool within the otherwise constructive regime that HMRC appear to be proposing in this section. It may be that the only workable sanction where HMRC has concerns about the quality of an unaffiliated agents work, which cannot be resolved by mutual agreement, is for HMRC to contact the clients of that agent directly to make the aware of HMRC's concerns, subject of course to safeguards such as notice to the agent and scope for appeal against the proposed contact. However, given the extraordinarily broad definition of 'agent' proposed by the draft legislation, such an approach may simply be unworkable.
5. Is access to the working papers of tax agents involved in deliberate wrongdoing a proportionate response to the problem HMRC has identified?
ACCA is concerned by the scope and extent of the powers sought by HMRC. In particular, the acknowledgment by HMRC that they seek to impose 'consequences… as if a criminal prosecution had been secured' in instances where deliberate wrongdoing has been 'established' seems to be an attempt to circumvent due process in the most serious of cases. HMRC must recognise that the disruption caused by an information request of the type they suggest would effectively prevent the Tax Agent from carrying out its normal business, whether HMRC's misgivings are ultimately proved to be with or without foundation. HMRC have recognised elsewhere the importance of reputation to Tax Agents; the damage caused to a tax agents business by a requirement to surrender all working papers would inevitably be considerable, and in many cases the business will need to cease altogether.
This will particularly be the case where an individual or individuals within a larger undertaking are suspected by HMRC of deliberate wrongdoing. An order giving access to all working papers (including tax advice and audit) of all clients of all those suspected by HMRC would deny those clients of their right to the services supplied by the undertaking. In a large organisation this would almost inevitably result in disruption to the affairs of clients where the Tax Agent(s) concerned had no more than a peripheral role in the affected clients' affairs. The potential for collateral damage to innocent parties far outweighs the potential benefits of the powers suggested.
The potential for collateral damage caused by HMRC's proposed approach becomes even greater where a tax agent affected by such a notice acts as outsourced payroll or VAT services provider to a number of clients. Inability to service those clients on a timely basis would have a knock on effect on the clients' businesses, regardless of whether they had any involvement in the alleged wrongdoing. ACCA wonders whether HMRC would consider late filing of PAYE returns to be 'reasonably excusable' where the problem arose as a result of HMRC's own actions?
ACCA is further concerned that HMRC have not fully considered the scope of the information powers sought and their interaction with other legal requirements on the tax agent. The list of papers at Annex B to the consultation document includes items which would belong to clients and which the agent would have no legal authority to release, for example statutory company records held within company secretarial files. Items such as time records and fee ledger accounts would be unduly onerous to produce in the first instance. Copies of fee notes alone should be adequate for HMRC to establish what further records it might need.
HMRC have identified in the Impact Assessment accompanying the Consultation Document a need to engage with small firms as part of the drive to improve standards, and ACCA wholly support this aim. However, we are concerned that the effects of an information demand of the type at Annex B to the Consultation Document would be devastating to the ability of such practices to conduct their trade, particularly for those who are still largely paper based.
6 What reasons are there to exclude tax advice and audit papers
Where conduct of a criminal nature has been proven, there is no reason to exclude tax advice or audit papers. However, it is not clear from the Consultation Document that HMRC is prepared to limit itself to such cases. The powers are apparently sought in cases where there is no more than doubt cast upon the credibility of working papers which cannot be sufficient to overrule the normal protections afforded by the legislation.
7. Should the application to the judicial authority for access to working papers be made with notice to the other side, unless it agrees HMRC's application for this to be without notice?
As stated above, ACCA does not believe that authority for access to working papers should be granted in the circumstances outlined by HMRC.
8. Are there any further safeguards that should be considered?
It seems clear that HMRC will almost certainly extend its powers so that it has much greater direct access to the agents working papers. We strongly advise that if this does indeed turn out to be the case then authority should be granted by a member of the Board.
9. Is access to the working papers of tax agents involved in deliberate wrongdoing but held by third parties a proportionate response to the problem HMRC has identified?
In the light of ACCA's comments above, the response must be no.
10. Are there any further safeguards that should be considered?
None.
11. Is a tax geared civil penalty for tax agents involved in deliberate wrongdoing a proportionate response to the problem HMRC has identified?
We do not consider that penalties are appropriate.
12. Should the penalty be reduced to encourage disclosure?
13. Should there be a maximum amount? 14 Should there be a minimum amount? 15 Are there further safeguards that should be considered?
While ACCA do not consider penalties appropriate, if a penalty regime is to be introduced then we believe that a reduction to encourage disclosure would be desirable. There should be a set maximum penalty and among the safeguards introduced we would expect to see a de minimis limit to remove penalties where tax loss is trivial.
16. Is publishing the name of tax agents involved in deliberate wrongdoing a proportionate response to the problem HMRC has identified?
Publicising the details of tax agents involved in deliberate wrongdoing would serve the dual purposes of discouraging the agents and also informing the public of their identity, reducing the scope for them to continue their activities. However, ACCA's support for this course of action is tempered by concerns about HMRC's definition of 'involved in deliberate wrongdoing'. HMRC should not be granted the power to inflict a 21st century equivalent of the mediaeval stocks upon tax agents without due process having been observed.
We have also mentioned in the workshops that while publishing the names of individuals is one thing but to publish those of tax agents is quite different as much more than a single person is affected. All the employees of a firm as well as other partners will be implicated and probably with no justification. ACCA understands that HMRC is aware of the potential implications and sensitive to them, but nonetheless considers that further clarity is needed from HMRC on the level of detail which would be released.
17. Should there be a de minimis threshold?
The proposed de minimis threshold would grant some additional protection to tax agents within the current proposed regime. We therefore consider the amount proposed is reasonable.
18. Are there further safeguards that should be considered beyond what is already provided in s94 FA2009?
None.
19. Are there any taxes or duties which should be specifically excluded? If so, why?
We consider that some of the capital taxes can be highly subjective as they may require asset valuations. We consider it inappropriate to bring instances where the tax adviser considers one value appropriate and this is subsequently shown to be too low hence creating a higher tax obligation within the scope of these proposals.
20. Does this proposed change provide a proportionate response to the problem that HMRC has identified?
Whilst the potential effectiveness of the proposed change in preventing outflow of funds from the Exchequer cannot be denied, its desirability, overall cost and long term effectiveness is less clear. The problem identified by HMRC is one whose root cause is lack of HMRC resource. Simply requiring HVAs to effectively resubmit their claims but with more documentation will in no way reduce the burden on HMRC.
21. Are the suggested safeguards sufficient?
In the context of industrially produced claims the proposed safeguards should protect those HVAs who are at what HMRC would consider the less culpable end of the range of behaviours. However it is not clear how HMRC propose to identify all affected returns, and there is no readily apparent mechanism for ensuring that genuine claimants do not get caught up in the process.
22. Are there any taxes or duties which should be specifically excluded? If so, why?
Rather than applying the powers to all taxes and considering exclusions, ACCA believes it would be preferable to apply the regime initially to personal Income Tax where the overwhelming majority of such claims exist. This would enable the legislation to be accurately tailored to the needs of the ITSA process.
23. Does recovering overpayments jointly from the tax agent provide a proportionate response to the problem HMRC has identified?
Subject to safeguards and due process, ACCA considers joint liability for recovery of incorrect overpayments to be proportionate.