Do HM Revenue & Customs have the powers, the resources and the determination to deal with rogue tax accountants?
I am not here referring to those who promote the complex and sophisticated tax avoidance schemes which make newspaper headlines. I am referring to small firms of tax accountants, or one man bands, who act for small or micro businesses for modest fees but who are – in a small minority of cases – utterly incompetent, irresponsible or even dishonest.
The sorts of poor work performed by this small minority include over-claiming of expenses, under-declaration of gross income, erroneous taxable profit computations and claims for tax reliefs, and a lack of integrity which allows the tax accountant to ‘change history’ by backdating events such as the declaration of a dividend of the commencement of a business partnership.
Undoubtedly these sorts of accidental or deliberate ‘errors’ by a small minority of incompetent, irresponsible or dishonest tax accountants cost HMRC millions in lost taxes every year.
Tax accountants or tax agents?
I refer to these people as tax accountants. HMRC would refer to them as tax agents, because they act as the agent for their client in dealing with HMRC. However their clients would refer to them as their accountant, not their agent, and so I am referring to them as tax accountants rather than tax agents.
Why would a rogue accountant succeed?
Proprietors of small and micro businesses generally have neither the skills nor the desire to get involved in the nitty gritty of accounts preparation or the completion of their annual tax returns. They are unlikely to be in a position to evaluate the competence of their tax accountant except to the extent of regarding a lower tax bill as a sign of a better service.
A rogue accountant may be able to produce a lower tax bill for a smaller fee, and ask fewer irritating questions of his client, than a more competent tax accountant would in performing his work thoroughly and with integrity.
So what’s the problem?
A rogue accountant will cause problems for HMRC in terms of tax revenues which are ‘lost’ and problems for competing honest and competent tax accountants who will be unable to offer an apparently comparable service.
But ultimately a rogue tax accountant will create a problem for his client if and when HMRC investigate his tax affairs and seek from him payment of under-declared taxes, interest and penalties.
There are a number of current trends which, in the author’s view, will lead to a worsening of the problem. Whilst a reduction of ‘red tape’ for small businesses is welcome in many respects, the simplification of accounting and tax return requirements gives more scope for rogue tax accountants to continue in practice undetected. At the same time it has become increasingly prevalent for individuals to earn their living by self-employment, requiring the completion of a self assessment tax return, rather than as employees of larger organisations.
This has coincided with a reduction in HMRC staff numbers and a new emphasis on relying on tax accountants to file information directly into HMRC computer systems so that fewer sets of figures are routinely reviewed, even briefly, by HMRC staff. Indeed HMRC are working on proposals to give tax accountants greater scope to deal with their clients’ tax affairs without the intervention of HMRC staff.
The role of professional accountancy bodies
But isn’t it the role of the professional accountancy bodies to ‘police’ their members to ensure that they are honest, competent and act with integrity?
Although it is not well known, anybody can set up in business as an accountant and act as a tax agent. It is estimated that approximately one in four tax agents registered with HMRC holds no recognised accountancy or tax qualification.
So whilst the professional accountancy bodies do exercise a role in ‘policing’ their members, there is nothing they can do to ‘police’ non-members.
What are HMRC and the government doing?
HMRC can and do prosecute rogue tax accountants. But such prosecutions are few in number because a criminal prosecution is very resource intensive, expensive and slow to come to fruition. HMRC have a high success rate in securing convictions when they do prosecute – but that may simply be an indication that they prosecute only in the worst and most obvious cases.
Penalties can be very severe upon conviction. Cheating HMRC is one of the relatively few criminal offences in English law for which there is no maximum sentence.
Aside from criminal prosecution, HMRC have power to levy civil penalties on tax accountants under Schedule 38 Finance Act 2012.
But all of these powers relate only to dishonest tax accountants – not to those who are merely incompetent or irresponsible.
Tax Agent Initiative Team
Perhaps in an attempt to fill that gap, HMRC have established a Tax Agent Initiative Team (TAIT) which has identified tax accountants whose clients appear to include a relatively high number of tax repayment cases – with a particular emphasis on subcontractors in the construction industry (CIS repayment cases). TAIT is conducting a programme of contacting these accountants, initially by letter, with a view to ensuring an acceptable standard of work by them in relation to the examination of their clients’ business records and the accuracy of tax returns submitted by them on behalf of their clients.
In particular TAIT is requesting tax accountants whom it has identified to voluntarily agree, by way of a signed Memorandum of Understanding, to confirm that the tax accountant:
- will examine underlying client records, at least on a sample basis,
- will ensure that each client views and approves his completed tax return before it is submitted to HMRC, and
- does not complete any subcontractor’s tax return in which expenses claimed exceed 20% of gross income unless the tax accountant has seen all the records to support that level of expenditure.
Alongside the Memorandum of Understanding programme, HMRC are conducting visits to some tax accountants to discuss HMRC’s expectations of the professionalism to be exhibited by them.
HMRC point out that in the event of a lack of cooperation from the tax accountant they may put a temporary stop on tax repayments in respect of tax returns submitted, pending completion of HMRC’s own assurance tests on returns submitted by that tax accountant.
The focus of this exercise is on tax repayment cases – not on cases in which tax is payable by the client but in a lower amount than the true liability.
What is not being done?
HMRC have no requirement that a person acting as a tax accountant must be ‘fit and proper’. There is no express legal provision a stop an individual acting as a tax accountant if he has, for example, a previous conviction for tax fraud. (Extremely rarely HMRC will decide to withdraw the tax agent status of an accountant but this has apparently been done only twice in the history of HMRC and on the basis that HMRC has a general discretion in discharge of their functions under s9 Commissioners for Revenue & Customs Act 2005.)
Nor is there any requirement that a person has any particular knowledge or skills before acting as a tax accountant. Anybody can set up as a tax accountant.
There is no legal requirement for a tax accountant to have a separate bank account, known as a ‘client account’, to safeguard monies which he receives but which belong to his clients – such as income tax repayments which he has received on their behalf.
Even more surprisingly, HMRC have no powers to levy civil penalties on a tax accountant who is incompetent or irresponsible (without being dishonest) and consequently files tax returns which understate his clients’ tax liabilities. HMRC, and English law, take the view that where incorrect tax returns are filed penalties are chargeable on the client – not the tax accountant. It is then for the client, if he can, to recover the penalty from the tax accountant by suing him for negligence – but there is no legal requirement for a tax accountant to carry insurance to cover any such claims.
Although the provisions of Schedule 24 Finance Act 2007 could be read as creating a liability to penalties for a tax accountant who incompetently or irresponsibly files an incorrect return for his client, HMRC have indicated that they have no intention of levying penalties on tax accountants under this legislation.
So it seems that the burden is on clients, and potential clients, of tax accountants to ensure that the person they instruct is sufficiently competent, thorough and honest to do the work properly. Or, of course, a taxpayer can simply do the job himself, calculating his own taxable income – and the best of luck with that!
(Note: This article refers to tax law in England and Wales. There are a number of additional issues which could be relevant to tax liabilities and penalties in particular cases which it is not possible to deal with in an article such as this. Appropriate professional advice should be sought in each individual case.)