With only just over a week until the notification deadline for the solicitors tax campaign (9 March 2015) we consider:
The campaign was launched on 8 December 2014. It allowed four months for notifications to be made to HMRC whilst the disclosure and payment of taxes need to be made by 9 June 2015. The period to notify of the intention to and disclose is much shorter than other campaigns. This could be because there are believed to be fewer that need to disclose or ironically because solicitors should recognise the seriousness of the implications of not disclosing.
- Why have solicitors been given the opportunity?
- Where could the potential irregularities be?
- Which solicitors are at greater risk?
- What should solicitors with tax irregularities do?
A view point shared in the media is that the targets are likely to be small owner managed practices who have suffered financial difficulties. This appears to be a little narrow minded.
HMRC’s Risk and Intelligent Services (RIS) is responsible (amongst other things) for researching and identifying campaign and taskforce targets. This process is achieved through analysing large quantities of information from many different sources through the Connect software system. The following are realistic functions of RIS relevant to solicitors:
- Profiling tax payers
- Business profiling
- Collating information available on a business which could include accounts, Companies’ House records (charges, shareholders, directors), tax returns, VAT submissions, employee information (PAYE), property ownership or rental arrangements, insurance details (professional indemnity) etc.
- Analysing employment records against the profile of a business
- Collating the information from web sites such as business websites, Facebook, LinkedIn, Twitter, Pinterest, You Tube and linking it to connections – whether businesses or individuals
- Linking land and property to owners (individuals, companies, trusts, including overseas owners) as well as against registered persons for the purposes of the electoral role, council tax and benefits
- Linking land transactions to the avoidance of Stamp Duty Land Tax (SDLT)
- Linking solicitors to other businesses or investments where tax appears to have been avoided
- Comparing bank transactions over accounts controlled by a firm of solicitors or its principles (assuming the information is not privileged and therefore available under Schedule 23 Finance Act 2011)
It appears to us that HMRC could probably find a little bit more meat than a small business under declaring its income. We believe identifying a solicitor under declaring income could be relatively easy. Most professionals are not paid in cash so bank transactions would reveal real income. It seems a little too simple to predict that small practices are under declaring their income.
Solicitors are often confronted with a number of opportunities, whether marketed tax planning or business/investment propositions. Could it be that a large number of solicitors have done a similar transaction resulting in the avoidance of tax?
You may recall new legislation being introduced relating to partnerships and the operation of PAYE on a partners income where they are not “genuine partners”. There appear to be a number of structures and solutions that could be used by those partners to avoid taxes, including trust arrangements similar to employee benefit trusts.
Another area might be the use of investments to avoid taxes, for example film partnerships, research and development partnerships, business property renovation allowance structures etc. Whilst many of these structures have been targeted from the other direction, maybe solicitors who invested are now being targeted.
A solicitor who bought a property and wanted to reduce the SDLT may have entered into a specific scheme to do so. If HMRC were successful in making those solicitors settle the liability through a disclosure facility, it appears much more strained to believe the clients they acted for could also not settle. Again, this is unlikely given most SDLT planning has been attacked.
There are strict professional rules on the operation of client accounts and solicitor client accounts are subject to an accountant’s submission. However, this may still be an area of risk given it might be possible for a client account to be utilised to facilitate the passing of income to personal accounts (maybe of connected persons) that would otherwise be subject to tax. This would however be within the realms of suspected serious fraud and the numbers of solicitors actually doing this may be low.
Solicitors with tax irregularities that do not come forward are at greater risk of criminal prosecution. HMRC will consider commencing a criminal investigation where (but not limited to):
- The person holds a position of trust or responsibility
- Materially false statements are made or materially false documents are provided in the course of a civil investigation
- Reliance is placed on a false or altered document or such reliance or material facts are misrepresented to enhance the credibility of an avoidance scheme
- There is deliberate concealment, deception, conspiracy or corruption is suspected
- False or forged documents are used
- In cases involving money laundering
A solicitor, who reasonably suspects they have a tax irregularity, should consider making a notification quickly. It might be prudent to outline the circumstances to a tax specialist to identify if there is a need and whether it is better to be within this disclosure opportunity or another. If a solicitor misses the notification date, it does not mean they cannot make an alternative approach to disclose to HMRC. Whilst solicitors handle the law every day, they might not be best placed to represent their disclosure!