Tax risk management

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Donald-Drysdale By Donald Drysdale for ICAS

2 May 2016

Thoughts on managing tax risks, based on a talk by Charlotte Barbour, ICAS Director of Taxation.

Today’s tax risks

My headline ‘Tax risk management’ will paint a variety of pictures for different audiences.

Multinational organisations grapple with increasingly demanding tax compliance and tax reporting requirements worldwide as a result of the OECD’s base erosion and profit shifting (BEPS) project. Here in the UK, large companies, groups, sub-groups and partnerships are to be forced to publish their tax strategies online, and special measures are to be applied to such bodies where there has been persistent lack of co-operation with HMRC.

Charlotte Barbour, ICAS Director of Taxation, gave a talk recently to the Glasgow Tax Forum on risk management issues facing tax practitioners. They and their clients, ranging from multinationals to individuals, need to understand what tax planning is acceptable and what is not. They face ever more stringent disclosure requirements for aggressive tax avoidance activities. Those who go too far can expect to pay harsh penalties for promoting, facilitating or engaging in offshore tax evasion.

While public opinion spotlights high profile multinationals that use aggressive tax planning techniques, naming and shaming laws now threaten all taxpayers (and their advisers too) when they stray over certain lines of acceptability.

The tax practitioner

As Charlotte Barbour emphasised, anyone providing tax compliance or advisory services should ensure that the clients they take on are appropriate – given their firm’s capabilities and the needs of the clients. In some cases, therefore, they should be selective about clients for whom they decide to act, ensuring that they and the client are well suited to one another. They should also avoid compromising their objectivity by becoming overly dependent on any one client.

The practitioner must ensure that they are competent to act, and that they do so within the scope of their expertise. They may provide wide-ranging tax services, or specialist services within a narrower field. In either case they should make sure they and their staff undertake continuing professional development (CPD) to develop and maintain the skills they require.

The terms on which a tax adviser agrees to act for a client are crucial. These should be recorded in an engagement letter agreed between the parties, and reviewed at least annually to ensure that they remain appropriate. An engagement letter must be clear as to what the agent or adviser does and doesn’t do – not only on compliance but especially on planning.

ICAS members in business and tax specialists working for in-house tax departments are governed by the same codes of conduct as tax practitioners.

In the case of Mehjoo v Harben Baker [2014] EWCA Civ 358, a firm of chartered accountants narrowly escaped liability for negligence when their client claimed that they should have advised on a complex tax planning product but failed to do so. Well-crafted engagement letters should help to avoid such disputes.

Professional Conduct in Relation to Taxation (PCRT) should be adhered to not only by practitioners who are members of ICAS or the other bodies subscribing to this guidance. It should also be followed by all other tax agents and advisers to demonstrate that they have applied appropriate professional standards. Failure to do so could expose them to potential professional indemnity claims.

Practitioners may be less circumspect when discussing tax informally with friends or family. However, they should bear in mind the non-tax case of Burgess v Lejonvarn [2016] EWHC 40 (TCC). Free services which the defendant offered to a friend assumed a degree of formality and resulted in a £265,000 claim for which no insurance cover existed – a salutary warning about how the dividing lines between personal and professional relationships can become blurred.

Related risks

Tax work involves risk of penalties being imposed by HMRC – for misdemeanours such as late filing, late payment or errors in returns. Furthermore, missed deadlines are frequent causes of clients’ claims against their advisers. Practitioners should have rigorous systems in place to avoid such mishaps.

Not all risks confronting tax practitioners are instantly recognisable as tax risks. Unless clearly defined in the engagement letter, there might be misunderstandings with the client on where responsibility lies for crucial matters such as compliance with the national minimum wage, the national living wage or pensions auto-enrolment – to name but a few.

Much tax work is already conducted electronically and, with the tide flowing towards ‘making tax digital’, the extent of online working will increase exponentially. While compliance with data protection legislation is crucial to avoid exposure to heavy penalties, the financial and reputational risks of loss, destruction or leakage of confidential data could also be catastrophic.

In-house tax personnel

ICAS members in business and tax specialists working for in-house tax departments are governed by the same codes of conduct as tax practitioners and (for example) should abide by all relevant parts of PCRT, even though they work in an alternative environment.

For them, the reputational risks to their organisations may be crucial. A hearing before the UK Public Accounts Committee or the US Senate Committee, being grilled on their approach to tax planning, is unlikely to be something the CEO or Tax Director would relish. Being exposed as aggressive tax avoiders might sully their image among shareholders, suppliers and customers and offer an edge to competitors.

Worldwide activities bring their own assortment of tax risks – particularly those relating to transfer pricing and treasury management. The BEPS project and the new spirit of transparency on exchange of taxpayer information are resulting in many changes.

Tax risks must be understood by all who work in this rapidly changing field, and those who fail to manage them will do so at their peril.

Article supplied by Taxing Words Ltd

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  • Tax

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