New HMRC proposals place tax lawyers between a rock and a hard place

Proposals to fine lawyers and accountants for ‘enabling’ tax avoidance could result in professionals being punished simply for giving their opinion on the legality of tax arrangements, City lawyers have warned.

The plans, announced by HMRC in August, are designed to address an estimated £3bn a year loss to the Treasury, with heavy penalties imposed on any organisation or professional that creates tax avoidance schemes.

HMRC’s consultation on strengthening tax avoidance sanctions and deterrents - which closes today, 12 October - proposes penalties including fines of up to 100 per cent of tax avoided and ‘naming-and-shaming’ for those who enable their clients to avoid tax using tax-planning methods the revenue regards as ‘defeated’.

If the legislation is passed as proposed, HMRC would also be given broad powers to define what is ‘legitimate tax planning’ and what is ‘unacceptable tax avoidance’, which, according to lawyers, would make application of the regulations completely subjective.

City firm RPC said the proposals would place many tax advisers in an impossible position between having a duty to their client and risking a fine from HMRC if the revenue disagreed with the tax advice provided. Meanwhile, refusing to advise their client could give rise to a claim for professional negligence.

Adam Craggs, a partner and head of the firm’s tax disputes team, said the proposals were a ‘broad attack’ on the ‘whole concept of tax advice’.

‘As they currently stand, they would make it very difficult for tax professionals to offer advice at all without risking fines,’ he said. ‘The system HMRC is proposing would place advisers’ responsibilities to their clients in direct opposition to their responsibilities to the taxman, and leave lawyers, accountants, and other tax specialists stuck between a rock and a hard place.’

He continued: ‘HMRC’s power to define what is tax avoidance and what isn’t means that it will effectively be judge, jury, and executioner when it comes to punishing those in the tax profession.

‘HMRC should look at taking substantial parts of these proposals back to the drawing board to make them more practical, objective, and realistic in order to provide a long-term solution to the problem of abusive tax avoidance.’

Tom Wesel, a partner at the international tax boutique firm Milestone, said the rules would be ‘unworkable’.

‘The government was right to introduce fines for advisers who collude with their clients in offshore tax crimes,’ he said. ‘But threatening to fine advisers for getting their honest advice wrong is simply counterproductive and sinister.’

Wesel continued: ‘Increasing intimidation through ever more draconian sanctions erodes and eventually breaks the trust and consent HMRC needs in order to collect tax.

‘It is naive to hope that these proposals will significantly reduce tax planning by sophisticated clients. The rules will just raise insurance premiums for advisers and drive advisory work offshore - additionally costing HMRC the tax those advisers would otherwise have paid.’

In August, Fiona Fernie, a partner at Pinsent Masons, said some aspects of HMRC’s plans went ‘too far’, with a definition of tax avoidance that was ‘far too broad at present’, while Rufus Ballaster, a partner at Carter Lemon Camerons, said that the proposed penalties were disproportionate.

John van der Luit-Drummond is deputy editor at Solicitors Journal john.vanderluit@solicitorsjournal.co.uk | @JvdLD