Accountants and advisors could face
tougher fines for helping clients avoid paying tax. So how can they make sure
they do not fall foul of the law?

Financial professionals who help people bend
the rules to gain a tax advantage are to face bigger penalties.

Under new Treasury rules that have been published for consultation, a
fine of up to 100% of the tax that was avoided could be imposed on any
accountant or financial advisor whose efforts to help a client escape paying
tax are judged to be unlawful.

The rules mark a change in the government’s approach to non-payment of
tax, as a result of the Panama Papers scandal. Already, the Treasury has stated
that the rules aim to root out tax avoidance at source and make it simpler to
enforce penalties when avoidance schemes are defeated. It is hard to believe
that this will not mean more scrutiny of anyone who does advise people on tax
matters.

Risk

The new rules may act as a deterrent rather than a punishment, with
financial professionals no longer taking the risk of being involved in new tax
avoidance schemes for fear of the penalties. But at present, there will be many
financial professionals who need to know what they must do to ensure they are
not among those punished under the new rules for existing tax avoidance schemes.

It remains to be seen what defences to the rules will be available. The
rules touch on both civil and criminal liability issues and no one working in
finance can afford to ignore them.

If we consider the rules from a civil perspective, financial
professionals could find themselves guilty of breaching them regardless of
whether or not they intended to. If breaching of the rules is a strict liability
issue, the lack of intent to break the rules will be no defence. This may seem
unfair but, as they say, “rules are rules’’. When it comes to criminal
liability, anyone accused of breaking the rules will have to go to great
lengths to prove that there was no intention to do wrong.

Clarification

In the rules’ current consultation stage, clarification is likely on the
point at which the government believes tax planning “tips over’’ into tax
avoidance. We are also yet to discover the amount of importance that will be
attached by the government to any inaccuracies in tax returns examined during
any such investigations.

For tax advisers, there is the question of whether they will face fines
even if they have made clients aware of possible risks. There is also the major
issue of whether they could be fined even if the advice they give is not
illegal.

When such matters have been clarified, anyone working in tax planning
may need to seek legal advice to make sure that every aspect of their work
complies with the new rules. It will be a time for making sure you are aware of
every aspect of the new rules and what they mean for the work you carry out for
your client base.

Scrutiny

But many more aspects of the work of a financial professional are likely
to face severe scrutiny by prosecutors looking to enforce the new rules. This
scrutiny, even if it does not lead to prosecution, could make it very hard for
a financial professional to continue working effectively.

It must be remembered that a number of high profile cases have come to
court in recent years involving schemes that have been ruled to be illegal
years after they were created – despite the professionals behind them genuinely
believing them to be lawful.

To avoid becoming one of the first to be penalised under the rules,
accountants and other financial professionals must ask important questions to
make sure their present and future tax schemes do not lead to legal problems.

Genuine

Putting it simply, is the scheme doing what it
is set up to do? Tax avoidance schemes supposedly for film production, music
industry collaborations and environmental schemes have all been ruled illegal
in recent years. A failure to fully investigate the genuine nature of a scheme
or a failure to make sure a scheme you devise is legal will, under the new
rules, bring hefty penalties for the professionals involved. A lack of proper
due diligence will now carry with it a high risk of financial penalties.

Anyone investigating a scheme will not only be looking to determine
whether it makes sense in its own right or whether it is a complicated ruse to
avoid payment of tax. They will be seeking evidence that it actually does what
it is set up for, whether it be film production, environmental work or whatever
other purpose was given for its creation. Crucially, they will also be looking
to see if there is genuine investment in the scheme – and whether that
investment is being used properly.

Most importantly for the financial professionals, they will be looking
to punish those they believe are to blame for the scheme. If such
investigations indicate that the scheme is simply some clever paperwork to
dodge paying tax, penalties will follow. For some years, there has been the
political will to punish the creators of tax avoidance schemes. Those
punishments now look to have arrived.

Those involved in devising, implementing, running and recommending tax
avoidance schemes now need to think like investigators to pre-empt problems.
They need to examine the nature of their work very closely and seek legal
advice on any “grey areas’’. Otherwise, they risk large penalties, damage to their
professional reputation and possible loss of their client base.