Back to Insights

Advisers have risks too

This article considers how an adviser can manage their risks and a client’s risks when HMRC open an enquiry.

  • A client with an enquiry is a risk
  • An adviser may have unseen risks as a result
  • Risk and Intelligence service are responsible for who is enquired into
  • Managing risks requires objective review, internal procedures (lots possibly long forgotten) and proactive approach to managing an enquiry
  • We offer our network of advisers a no obligation enquiry review and feedback service
By admin
01 Jun 2015
Tax Investigation

An adviser’s risks

Any firm renewing their professional indemnity insurance will know that where tax advice is insured against the cost has increased. The reason: HMRC are actively targeting many areas of tax planning and perceived areas of tax risks resulting in a higher possibility of complaints and claims on professional insurance.

Some firms may consider that they have not provided a client with tax advice and instead have chosen to simply introduce an expert. This is often the situation where an accountant has become aware of a tax planning opportunity (a tax scheme or innovative structure) that suits a particular client. However, clever litigators are likely to consider the extent of an adviser’s duty of care.

A particular risk that springs to mind is where an adviser has introduced a client to a tax scheme and correspondence may demonstrate the adviser has encouraged the use of a particular scheme. In this situation, the client may consider their trusted adviser has given the planning their seal of approval. What if an adviser had not considered or was not aware of what alternatives were available? The adviser may not have an obligation to consider all the alternatives but they may have a duty to suggest that the client or they do consider the alternatives. The extent of the adviser’s involvement with introducing a client to an opportunity will inevitably affect their risks. For example, the adviser with one client that has undertaken schematic planning as opposed to one that has a large percentage of their clients undertaken such planning for consecutive years may be at lower risk from:

  • Claims on insurance

  • Complaints to professional bodies

  • Increased information passing to HMRC

  • Potential damage to reputation

  • Potential loss of business

These risks are not limited to where schemes have been implemented. The same risks can arise where a client under enquiry feels that identified errors should have been managed by the adviser. Also, clients often look to their adviser to manage an enquiry and resolve issues with HMRC. Where the enquiry is not handled appropriately from the outset, a client may contend that the adviser caused increased problems for them by the manner they adopted with HMRC. Where penalties are arguably higher as a result, the threat of the risks set out above is more prevalent.

Managing risks

At the time an enquiry opens, what has happened can’t be changed. It is necessary to consider what can be done now to manage risks.

  1. Review the enquiry

    HMRC rarely open an enquiry for the joy of taking an uncalculated review of a taxpayer. Nowadays, enquiries originate from HMRC’s Risk and Intelligence Service (“RIS”) who spend their days playing with that award winning software, Connect. At the time a letter opening an enquiry is received, it is important to consider the request for information and what possible tax irregularity it could relate to. An opening letter may not always indicate where the enquiries are going. It may simply be structured to alert the taxpayer that HMRC are enquiring thereby giving them the opportunity to come forward and make a disclosure. Most advisers cannot place themselves in HMRC’s shoes due to not having experience in investigative techniques as well as potentially having conflicts of interest. We would highly recommend reading the article we published April 2015: HMRC’s Connect.

    We offer our network of advisers a no obligation enquiry review and feedback service.

  2. Internal review

    Having identified the potential reasons for the line of enquiry an adviser should consider the following questions:

    • What are the terms of your engagement and is your position limited where you introduced an expert?

    • Are the services you have provided included within the parameters of your engagement?

    • Have you provided full advice to include the consideration of options available to the client?

    • Do you have any conflicts of interest?

    • Do you have the experience and technical expertise to manage the enquiry?

    • Is there a requirement to notify insurers (both fee protection and professional indemnity)?

    • Is there a money laundering reporting obligation?

    • Should a tax risks specialist be approached?

    • In light of all facts, is it in the client’s best interest that the adviser acts in relation to the enquiry?

    • Is the engagement letter in place sufficient to act in relation to the enquiry?

It would be prudent to formally note that the above have been considered and the outcome of those deliberations. Often it is worth holding a separate risk meeting to objectively consider the questions. Where a firm is large enough it may be prudent to form a risk committee who independently approach these questions and record their findings. This approach, whilst appearing bureaucratic, demonstrates to professional bodies and insurers that systems are in place to monitor risks and manage situations where client complaints may occur.

The approach also forces an adviser to be objective and hopefully put conflicts to one side to consider the client’s best interests.

  1. Managing enquiries

    Assuming the following:

    • No conflicts of interest

    • Relevant experience of managing enquiries and dealing with HMRC

    • Technical expertise

    • Satisfied advice given was complete

    • Resources are available to manage and deal with the enquiries

It would be prudent to consider the timescale with which to respond to HMRC. A notice is normally accompanied with a request to respond within 30 days. However, this is the minimum period required and it may not be practical to respond within the time frame. Given we would generally suggest that at the outset of an enquiry the following is undertaken, is it prudent to request a period of sixty or ninety days to respond?

  • Review of client files to establish any potentially contentious areas

  • Analysis of business performance over a period of time

  • Identification of tax planning undertaken

  • Establish all corporate interests

  • Consider whether there have been PAYE/VAT audits of business interests as well as whether enquiries undertaken (and review)

  • Meet with the client to discuss possible areas of irregularities

We often undertake a forensic study of a potential client ahead of a meeting. You will be amazed at what information is available and, alongside experience, enables us to preempt areas of tax issues.

Telephoning the HMRC officer ahead of the client may also be beneficial. It will demonstrate the seriousness an adviser and client are taking towards the enquiry. It will also explain the rationale for extending the response time – for example availability to hold the meeting. Care must be taken during the call not to make any indications relating to tax exposure or areas being considered. However, it is always useful to request of the officer any specific issues he/she would like you to consider with the aim of fully cooperating and efficiently reporting back. The officer will normally assert that it is for the taxpayer to make a disclosure of any irregularities although may let out one or two broad areas of interest.

The risk areas can then be discussed with the client (preferably at a meeting). Often the client will bring your attention to areas where there could be tax irregularities. It is worth noting that rarely are all released immediately.

It is important to document what is discussed at client meetings and to confirm the following to them at the meeting and in subsequent written correspondence:

  • The implications of not disclosing tax irregularities to HMRC to include increased penalties and in the event of suspected fraud, the possibility of criminal investigation and prosecution

  • It is often useful to discuss how HMRC can access information without a taxpayer’s knowledge

  • The initial areas the client has set out, which may have tax irregularities

  • Areas where the adviser has concerns and requests the client to consider in more depth

  • Whether given the initial review, what code of practice the enquiries/disclosure should be under

It will become apparent that the adviser has placed themselves in a more comfortable position to enter into communications with HMRC and/or make a disclosure.

Where there are tax irregularities, we would suggest that they are all be presented to HMRC as opposed to answering their questions and the officer arriving at a conclusion. A disclosure report adopted by a client would be prepared by the adviser and the case presented for the following reasons:

  • It manages time better rather than reacting to HMRC’s queries

  • Technical arguments can be presented

  • Penalty mitigation is likely to be greater as a result

  • Through the process other irregularities may come to light – its better the client and adviser bring these to HMRC’s attention as opposed to them discovering them for the client!

Many enquiries appear simple at the outset and then unexpectedly develop often consuming the adviser and client. The approach we outline should assist to prevent unknown escalation.

Advisers can take advantage of our no obligation review of enquiries. Where required, we can be instructed by an adviser to assist them. In the event of serious investigations it is likely we would need to be appointed directly by the client.

[cs_gb id=1263]

Back to Insights

Get a quick quote