HM Revenue & Customs Consultation Paper

“Draft legislation on deliberate wrongdoing by tax agents” Published 19 February 2010

Chartered Accountants Ireland Response Paper 30th April 2010

The above consultation seeks views on the above draft legislation on Deliberate Wrongdoing by Tax Agents. HMRC have stated that the draft legislation reflects the proposals in the consultation document Working with Tax Agents: The Next Stage published on 9 December 2009.

About Chartered Accountants Ireland

Chartered Accountants Ireland is the largest and longest established accountancy body in Ireland. It has over 18,000 members and 5,000 students, and it is the leading voice of the accountancy profession in Ireland.

Chartered Accountants Ireland was established by Royal Charter in 1888. Its activities and those of its members are governed by its Bye-Laws and by Rules relating to professional and ethical conduct. These provisions are contained in the Handbook which is available to all members.

Chartered Accountants Ireland is governed by a Council and it is responsible for determining policy and monitoring its implementation. Council is lead by the Officer Group and supported by the Management Team and staff. A number of committees with voluntary member involvement also play a key role.

Contents

1.	Introduction
2.	Specific Issues and Concerns
	2.1	Definitions
		The definition of “Agent”
		The definition of “Deliberate Wrongdoing” (DW)
		The definition of “relevant documents”
	2.2	Power to Issue a Tax Agent Notice (TAN) and Obtain Relevant Documents.
	2.3	Penalties and Sanctions
	2.4	Scope of the Legislation
3.	Conclusion

1. Introduction

Chartered Accountants Ireland and its members are fully committed to compliance across all tax heads, and to all reasonable measures to ensure the proportionate enforcement of tax collection. Within those principles, we have reservations about aspects of this proposed draft legislation.

In this submission, we do not intend to provide commentary on the detailed provisions of the proposed legislation as we believe that in its current format, the powers potentially available to HMRC are simply not properly targeted, effective or proportionate. We feel that much of this legislation could need to be set aside or rewritten after a full and complete consideration of all the issues and concerns raised by our profession. We are encouraged that initial reaction to the proposals has already been responded to, and the complexity of the issues recognised by the extension of the consultation period.

Our comments are made in the context that it is right for HMRC to have appropriate powers to take action against what we believe to be the very small minority of Agents involved in Deliberate Wrongdoing. Unfortunately, to date, HMRC have failed to convince us of the need for additional legislation in this area. In particular we question whether it would have been more appropriate to utilise the powers already available in the Taxes Act.

We are also disappointed that HMRC appear not to have taken into consideration when drafting the Legislation the many concerns and issues highlighted during the Working With Tax Agents Workshop held on 9 October 2009.

Legislation, when enacted, can always be amended. Consultation on draft legislation is a more efficient approach. But we would not agree that the correct approach to such an important issue is for HMRC to clarify the Legislation once enacted by issuing guidance or comments.

Nevertheless we wish to highlight the following specific issues and concerns in relation to the draft Legislation.

2. Specific Issues and Concerns

2.1 Definitions

The definition of “Agent”

Once again, this is extremely widely drawn and appears so all encompassing that casual advice provided to friends, family and acquaintances outside the normal Agent/Taxpayer relationship will be caught. In an extreme scenario it would even appear that “the man in the pub” would be classed as an Agent.

We think the definition herein of both Agent (and by default Client) needs to encompass someone actually engaged (whether informal or formal under the terms of an engagement letter) to give advice or assistance in relation to a persons tax affairs.

The legislation also needs to clarify the position whereby the Agent/Taxpayer relationship ends, for example where the individual involved leaves a practice, retires or dies.

The definition of “Deliberate Wrongdoing” (DW)

We are disappointed to find that the proposed definition is so widely drawn – it would appear that simple legitimate tax planning such as advising a client to set up an ISA could potentially be caught or even that DW could arise in situations where something other than a meaningful relationship exists.

For example it would appear that individual's preparing Media Articles advising on legitimate tax planning routes would fall within the definition of DW in the draft legislation – the advice provided therein would constitute an “act capable about bringing about a loss of tax” and the “act is done deliberately” i.e. the Agent has set out in the newspaper article to inform readers of potential (entirely legal) routes to mitigate their tax liability.

This is at odds with HMRC's own view of what constitutes DW – we refer you to your December 2009 Con-doc “Working with Tax Agents: The Next Stage”.

That document talked in detail about DW by tax agents being “conduct that tax legislation previously described as fraud or dishonest evasion” but noting that HMRC guidance now referred to it as “knowingly and intentionally wrong” and “resulting in a loss of tax”.

It specifically did not mean “tax planning” or “taking a defensible view at odds with HMRC's interpretation of the Legislation. Nor was the DW concept intended to apply where there was a potential loss of tax (as provided for in the draft legislation).

The definition of “relevant documents”

This definition appears all encompassing meaning that all sorts of other non-relevant, nontax documents could be included, nor is the ownership of the documents clear. We are also concerned that once again the ability to claim Legal Professional Privilege continues to provide those able to avail of this status with an unfair competitive advantage.

2.2 Power to Issue a Tax Agent Notice (TAN) and Obtain Relevant Documents.

It would appear that this Notice can be issued whether or not a penalty has been imposed. Potentially the most worrying provision in the draft legislation, this seems to allow HMRC access to files even before a case has been sufficiently built to impose a penalty.

It does not state who decides whether DW has been committed and how this is decided, appealed against or reviewed. Furthermore, the definition of person therein is also very widely drawn, there needs to be some sort of connection between the parties involved and a defined timescale for same.

We are very concerned that the definition of relevant documents coupled with the Power to issue a TAN will present an inordinately heavy administrative burden on practices of all sizes and could result in a severe disturbance to the normal commercial arrangements for provision of tax services and advice by our profession.

We are however pleased that HMRC have now agreed that the Tribunal approval route for TAN's will always be inter-parte.

We also wish to highlight our concern that the TAN procedure will allow HMRC to conduct unnecessary “fishing” exercises and the impact of same on Agents found to be wholly innocent – what power of restitutional compensation will be available to them given the potential for damage to reputation and livelihoods?

The requirement for provision of relevant documents “within such period, by such means and to such a person and place as is reasonably specified in the notice” is very widely drafted, we strongly recommend that a minimum reasonable timescale be provided in excess of 30 days, so that the Agent has the opportunity to challenge same.

It should be noted that while the thrust of the Legislation is aimed at individuals, these individuals will mainly be employees of businesses and therefore the “relevant documents” being sought will not be the personal property of that individual.

2.3 Penalties and Sanctions

In short, these provisions are not properly targeted or in any way proportionate to the amount of tax actually lost. Furthermore, how will this be penalty be assessed in situations where no actual loss has resulted?

Please clarify the requirement for a minimum penalty – a short example follows to demonstrate our concerns.

A small practice with one Partner has always allowed clients a deduction of £500 in self-employed returns for use of private phone despite no business use of same. During an enquiry, HMRC discover this and then when examining the returns of other clients of the practice realise that this treatment has been adopted on 10 clients in this particular firm.

What is the penalty position if the agent is found to have engaged in Deliberate Wrongdoing in the 2010–2011 tax year?

Tax computation of self-employed individual

Taxable profits (with £500 private phone deduction)	£35,000 *
Tax payable at 20%	£7,000
Class IV NIC £29,285 at 8%	£2,343
Total tax and NIC payable	£9,343
* After personal allowance

HMRC amend the computation to increase taxable profits by £500 to £35,500 – the tax computation is then as follows:-

Tax payable at 20%	£7,100
Class IV NIC £29,785 at 8%	£2,383
Total tax and NIC	£9,483
The tax and NIC lost is therefore £140 × 10 clients totalling	£1,400

Say the practice has two junior staff and one manager. One junior member of staff prepares the accounts and the other junior staff member prepares the tax return. The accounts and tax return are both reviewed/signed off by the manager and partner. Each individual is aware that there is no £500 business use of the private phone – therefore the inclusion of this in the accounts and failure to add this back in the tax computation comes within the definition of “Deliberate Wrongdoing” in the draft legislation – each individual person is classed as “Agent” (Sch 1 Part 1 Par 2(5)).

The penalty will be as follows

The minimum penalty is £5,000 (Sch 1 Part 3 Par 25(1)(b) however (assuming) prompted disclosure (Sch 1 Part 3 Par 28(3)(b) this becomes £2,500 per each head of tax under Sch 1 Part 3 Par 25(1)(b) (tax and NIC are both involved here).

The penalty is therefore £5,000 in relation to each act of “DW” by each “Agent”. Over 10 clients that comes to £50,000 in total for each member of staff making £200,000 in total for the practice overall.

From this simple example based on the draft Legislation as it currently is, you can clearly see the total potential penalty of £200,000 is grossly disproportionate to the tax lost of roughly £1,400.

We would also like to point out that the £5,000 starting point of this penalty is a minimum penalty, it seems difficult to reconcile this with the maximum initial penalty of £5,000 under DOTAS where a promoter or a user fails to disclose a scheme or pass on a SRN when required – this penalty applies in cases where there is likely to have been a significant tax advantage obtained.

Under the proposed DW legislation, the penalty provisions bear no relationship to the gravity or significance of the amount of tax lost and can actually arise whether or not a loss has occurred.

2.4 Scope of the Legislation

Questions also arise as to:

• What previous period(s) HMRC will seek to challenge?
• Will the practice and its clients be liable to more detailed scrutiny?
• Will HMRC widen its net out to other clients and if so, in what timescale?
• What happens if say an Agent dies, refuses to pay, leaves a practice or retires?
• What is the time limit for imposition of a penalty?

3. Conclusion

Finally, it is our view that the risks presented by this draft legislation could seriously prejudice the ability and desire of smaller firms and sole practitioners to provide tax services in the future.

In the current economic climate we do not wish taxpayers to feel they have to seek assistance from Agents operating outside the UK, as could surely happen.

Indeed it also seems possible that this could lead to increasing numbers of Taxpayers completing and submitting their own returns and given the complexities and burdens already presented by our tax system, it is difficult to see how this could be viewed as productive or indeed fulfilling HMRC's Charter promise to “accept that someone else can represent you” (whilst making it as difficult as possible for them to do so).

We are particularly concerned about this in the context of the Northern Ireland Market.

Further questions arise as follows:-

• If introduced “as is” will naming and shaming of Agents found liable under this legislation follow in the future?
• Have Human Rights issues been considered and addressed?
• Is HMRC planning in the future to move to a system of conducting “Risk Reviews” of Agents?
• Has the possible impact of EU Competition Law been reviewed in relation to the offshore Agents issue?

The proposed legislation raises many complex issues which we have already highlighted herein. Perhaps, in light of this, it is time for or suggestive of the need for Agents to have similar protection to Taxpayers in the form of an Agent's Charter.

Once again, we reiterate the need for further consultation and consideration to address these serious matters.

NPS Update

“Q; When do you expect to start pushing P35 data to individual NI records and when do you expect to complete the process?

A: By the end of June last year we had processed 98.4% P14s onto NI records. We're aiming to do the same this year.

Q: When do you expect to start pushing P35 data to individual PAYE records and when do you expect to complete the process?

A: The process has already started. P14 information is posted to the NI record and PAYE record simultaneously.

Q: When do you expect to start recording P11D data on individual PAYE records and when do you expect to complete the process?

A: As in previous years, the P11D capture programme starts in the middle of June and runs to the end of September.

Q: Will non SA repayments submitted on form R40 or by writing to tax offices be dealt with quickly? Can agents send forms P60 with repayment claims to speed repayments up for their clients?

A: Where we do not receive evidence of pay and tax deducted with the claim we need to verify the P14 details once they are posted to the NPS record. This is the same process that we have adopted in previous years and may lead to a short delay depending on when the P14 details are submitted and posted to the record. Customers and agents are free to send P60s with any claims and these can be used to allow the claim to be dealt with.

Q: Are you dealing with repayment claims quickly in cases where evidence of tax deducted is provided or posted to the NPS record.

A: We are aiming to make repayments in accordance with our normal standard of four weeks. However, the early moths of the tax year do result in extra volumes of claims being received so there may be periods when it takes us slightly longer to make repayments. We are monitoring repayment claims we receive and aim to prioritise these over others forms of correspondence. It would help us if all such claims are clearly marked so that they can be streamed correctly. You should also be aware that we continue to operate an appropriate level of security checking before we make claims to guard against fraud. A proportion of cases will be delayed for a short period whilst we undertake these checks, but otherwise we plan to meet our normal standards over this period.

Q: At what stage are amended codes for 2010/11 likely to be issued? Will it be after the P35 data has been put on individual records, when the P11D information is put on the records or after the later of two appears on individual records?

A: The P14 and P11D (where applicable) is the data needed to check the end of year liability of each individual. When both have been posted to the record the automated end of year reconciliation takes place. Each account will be reconciled in one of 3 ways

Reconciled – balanced

Reconciled – underpaid

Reconciled – overpaid

A P14 would not prompt a change of code but a P11D could. In 2007 we introduced autocoding which means that P11D information automatically flows to the coding record and updates codes. Autocoding will only be triggered once in any year so once a code has been updated either from autocoding or by clerical intervention, it will not be triggered for a second time. So where an employee has already requested a coding change for 2010/11, the processing of the P11D will not over-ride the change.

Q: What will happen to 2010/11 codes after 2009/10 SA returns are filed? Again, practitioners are concerned that codes may be changed as a result of the submission of the SA return, even though the code is correct in the light of known 2010/11 income details.

If the code has been updated since the Annual Code for 2010/11 was calculated the SA autocoding process will not over-ride the amended figure. Items that have not been amended will be automatically updated when the SA return is processed.

Filing forms P14 and P35 separately

We recently sent a letter to a small number of employers who had experienced difficulties with part-filing. We're sorry if this was seen as a move to discourage employers from part filing. This was not the intention and we recognise that this is a perfectly acceptable method of filing returns.

Contacting HMRC Helplines

Lately our contact centres have been exceptionally busy. More customers have been contacting us in significant numbers over the last couple of weeks because they wish to query the coding used in their April pay packets. We are aware that some customers, because of the increase in demand, are finding it difficult to get through to an adviser and we apologise for this and are doing all we can to meet the need.

We are constantly matching our available resources with customer demand, most often on an hourly basis and sometimes in “real time”. Our telephony system checks across our Contact Centre network to direct each call to the next available adviser, but inevitably at busy times we may be unable to answer all our calls. We are working hard to maintain a good customer service. We know, for instance, that some customers have been frustrated by being disconnected after they have been through the IVR messaging system, but before they speak to an adviser. We are now taking new measures to help prevent this from happening.”

Source: HMRC Notification.