HMRC: Two consultations
Tax lawyers face more reports by HM Revenue & Customs (HMRC) to their regulators and the cloak of legal professional privilege (LPP) being pierced under government plans unveiled yesterday.
Two consultations published alongside Chancellor Rachel Reeves’ spring statement aim to give HMRC greater powers to tackle professional tax advisers who facilitate non-compliance, and deal with the promoters of tax avoidance schemes and lawyers’ role in them.
The first consultation is targeted at tax advisers, including lawyers, who cause harm to the tax system or facilitate their clients’ non-compliance, even if they do not interact directly with HMRC.
The government is proposing to expand the current requirement that HMRC must have determined that a tax adviser has behaved dishonestly before issuing a conduct notice and requesting information in a file access notice.
Instead, it wants to allow HMRC to exercise these powers where it “reasonably suspects” the adviser has facilitated an inaccuracy in a taxpayer’s document or return. However, the consultation makes no reference to the interplay with LPP.
It also plans to reform the financial penalty for failure to comply with a file access notice – currently limited to £50,000 – so that it is linked to either the potential tax loss or the adviser’s fees.
Around two-thirds of tax advisers are members of professional bodies and HMRC has statutory power to make public interest disclosures (PIDs) to those bodies about misconduct.
At the moment, the threshold is that the professional body would likely investigate it as a disciplinary matter, but HMRC wants to report “more routinely” lower-level misconduct that still harms the tax system.
The consultation said: “The government is interested in exploring what further disclosures HMRC could make to professional bodies in addition to PIDs, with a view to working collaboratively to manage specific issues or broader patterns of concern that HMRC is in a position to identify.
“Sharing information in this way may enable professional bodies to provide timely help and support that prevents issues from escalating into more serious difficulties.”
In the event of a lawyer being disciplined following a PID, HMRC proposes publishing this information.
The second consultation aims to beef up HMRC’s powers so it can “close in on promoters of tax avoidance” and contains specific proposals to tackle legal professionals who design or contribute to such promotion.
Since April 2022, HMRC has published information on 135 schemes and those who promote them, a move that was informing taxpayers and “having a disruptive impact on the promoter market with many schemes closing down shortly after publication”.
However, HMRC cannot name lawyers who have been involved if there are reasonable grounds for believing that their role is limited to activities subject to LPP – a safeguard the government now wants to remove.
As a result, HMRC would be able to name the lawyer and, where appropriate, their firm. “This information would be used to warn taxpayers about the risks posed by these legal professionals who are also acting as designers of tax avoidance.”
The consultation said schemes were often marketed by saying that a KC, usually, has given a favourable legal opinion about it.
“Promoters do this to attempt to reassure potential scheme users that entering the arrangements is low risk.
“Unfortunately, whilst many schemes are purported to have legal advice that seemingly supports the arrangements, when challenged, the courts find that the vast majority of these schemes do not work. This calls in to question how robust the original advice was.”
The consultation proposes introducing a “deemed waiver” of LPP in these circumstances, meaning the promoter would be required to disclose the legal advice to HMRC if compelled by an information power to do so.
“Having this information might allow HMRC to challenge some of the promoter’s claims about the scheme with regards to the legal advice they have received.
“It may, under existing powers, also allow HMRC to publish the details of these legal professionals alongside the scheme information and names of the promoters, and potentially the legal advice, on GOV.UK.
“Where appropriate to do so, HMRC could share this information with the relevant regulatory bodies such as the Bar Standards Board or Solicitors Regulation Authority, who could then decide whether to take action.”
HMRC said it intended to engage with the legal regulators “to discuss the operation of their codes of conduct and how HMRC can better support them to take the most effective appropriate action against their members when they are breaching these rules”.
The consultation also complained about HMRC facing claims that certain documents were privileged when they were not, purely to hinder its activities.
It intends to draft new guidance that will set out its position on the circumstance when LPP does and does not apply.
“Such guidance will provide a clear signal of how HMRC intends to approach disputes relating to LPP.
“By providing such guidance HMRC should be in a better position to determine which information should be disclosed and challenge inappropriate claims of privilege before the [tax] tribunal.”
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