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What HMRC’s tax avoidance crackdown means for your customers

At a glance

  • HMRC is taking an ever more vigilant approach to tax avoidance schemes, with an increase in high-profile claims against celebrities and well-known businesses
  • Accountants and financial advisers can be the subject of litigation if involved in such arrangements, even if only acting as introducers and not offering formal advice
  • The spotlight on tax avoidance is expected to increase over the coming years, and brokers should be aware of the ways in which their customers can avoid costly litigation

High-profile celebrities are among approximately 1,600 people thought to have invested in the £1.2 billion Liberty tax avoidance scheme, which HM Revenue and Customs (HMRC) has brought to a tax tribunal.

But it is not just rock stars, pop stars and actors who will be taking a keen interest in the tribunal’s outcome; the accountants and financial advisers who referred their customers to Liberty (and their brokers) will also be eager to see what happens.

HMRC is taking an increasingly robust approach to tax avoidance schemes, which is hardly surprising when you consider the total tax under consideration in decisions referred to HMRC’s tax commissioners amounted to £3.9 billion last year.

The UK Disclosure of Tax Avoidance Schemes (DOTAS) – which ensures anyone entering into a scheme generating tax savings is issued with a number by HMRC, so it can investigate the structure later – has helped the Revenue shut down a string of tax avoidance structures such as the Icebreaker and Eclipse schemes. This has forced investors to pay millions in current, and backdated, sheltered tax.

In his March Budget, Chancellor George Osborne unveiled further proposals to crack down on tax evasion and aggressive tax avoidance, which he said would generate £3.1 billion for the Treasury. Mr Osborne also promised HMRC would issue more “accelerated payment notices”, which allow the taxman to demand upfront payment of disputed tax sums.

Potential for litigation

Top tips for your accountant and IFA customers:

  • Ensure terms of engagement include strong contractual disclaimers on the limitations of any advice
  • If acting as an introducer to any product, ensure customers fully understand the risks, and that their understanding and acceptance of these is documented
  • Regularly review customer agreements and risk profiles
  • Retain thorough records of all advice given to clients
  • Keep abreast of the latest political and legal developments regarding tax avoidance
  • Speak to Zurich about further risk-management strategies to avoid future claims

Many tax avoidance and mitigation schemes feature referral fees, offering incentives for accountants and financial advisers (IFAs) to act as introducers to such schemes. In the event of an HMRC investigation into the legality of such schemes, an introducer can quickly become the subject of a professional negligence claim.

“Where an accountant or IFA has acted as an introducer, claims are sometimes made against those advisers. While unlikely to be held fully liable, there is much evidence to suggest that those acting in a purely introductory capacity can still be found to be contributory negligent,” says Steve Watson, Head of Professional Indemnity (Global Corporate EMEA and UK General Insurance) at Zurich.

The sums involved in tax avoidance claims can be vast. For example, the promoters of the Innovator One tax scheme, and the solicitors who acted for them, faced (and ultimately successfully defended) a £60 million negligence claim from more than 500 claimants.

Keeping within your remit

Accountants and IFAs are often asked to offer some level of advice on tax matters. In those circumstances, it is essential not to stray outside the terms of engagement or the business’s area of expertise. Overstepping the mark, even just to offer some friendly extra advice, can bring very real exposures.

Steve says: “Professionals should never stray beyond the realm of their own expertise and experience. When asked to comment on something outside of their remit, advisers should recommend that their clients seek more specialist advice.”

Rosie Wilson, Financial Lines Solicitor at Zurich, explains: “Drawing upon our years of experience in defending professionals, we aim to work with our customers to help them understand the risks associated with tax avoidance schemes, and what can be done to minimise that risk. We regularly meet with our customers, and give seminars on hot topics and the practical steps they can take.

My advice for brokers is not to underestimate the potential of this issue. I think the Revenue is only just starting its crackdown against tax avoidance schemes.

Steve Watson, Head of Professional Indemnity (Global Corporate EMEA and UK General Insurance) at Zurich

“For example, it is of the utmost importance to regularly review customer agreements and risk profiles, keep abreast of any changes in the field – such as new legislation – and retain all documentation concerning any advice given to clients.

“Our internal Risk Consultancy team can work with customers to analyse their potential risks. We have strong links with leading law firms and industry experts, and are able to tap into this knowledge base to assist our customers.”

The future of tax avoidance

Before the general election, the cross-party Public Accounts Committee called on the next government to introduce new laws to prosecute financial advisers who aid aggressive tax avoidance. Following the Conservatives’ victory, it has been reported that further measures to tackle tax avoidance, including the exchange of information with foreign tax authorities, could be on the way.

Zurich is keeping a close eye on developments in this area to ensure it continues to offer the best insurance solutions for its customers.

“My advice for brokers is not to underestimate the potential of this issue,” says Steve. “I think the Revenue is only just starting its crackdown against tax avoidance schemes. Its most recent budget indicates an intention to issue around 61,000 accelerated payment notices over the coming years; so far it has only issued around 10,000, so there may still be a long way to go.”

For more information please speak with your local Zurich contact.

Image © Alamy

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