On 12 November 2020, The Rt Hon Jesse Norman, Financial Secretary to the Treasury, announced that the Government intends to consult on making professional indemnity insurance ("PII") compulsory for tax advisers, as part of a bid to protect consumers and raise standards in the tax advice industry.
HMRC Standard for Agents
At present, about 70% of tax advice is given by professionals like solicitors, accountants, chartered tax advisers and taxation technicians. Such professionals are members of professional bodies that subscribe to standards such as Professional Conduct in Relation to Taxation ("PCRT") and are required by their professional bodies to take out PII. The Government's focus, however, is on the 30% of tax advisers who are not presently affiliated to a professional body and not required to carry PII. In particular, the Government is concerned that such advisers often do not adhere to HMRC's 2016 Standard for Agents ("the Standard"), a brief statement of important principles which is considerably less detailed than the PCRT.
The Standard requires agents to promote tax compliance and, more specifically to act with integrity, professional competence and due care. In particular, Standard 3.3 expressly forbids agents from creating, encouraging or promoting tax planning arrangements or structures that set out to achieve results that are contrary to the clear intention of Parliament or are highly artificial or highly contrived and seek to exploit shortcomings in relevant legislation.
Had it existed at the relevant time, the Standard would not have been met by many of the professionals engaged in designing and marketing film finance and SDLT mitigation schemes.
The Standard has no legal force. In the event of a breach, HMRC can disclose suspected misconduct to professional bodies, alert agents to concerns about their practices, refuse to deal with agents and suspend access to online services. It can pursue criminal or civil cases, but only if a crime, for example, money laundering or other unlawful behaviour, has been committed. Breach of the Standard is not, of itself, an offence or civil wrong.
While the Government does not propose to introduce a new regulator, it is considering giving HMRC additional powers to act against entities or individuals that aggressively promote tax avoidance schemes. Potential powers include the ability to shut down promoters and to restrict individuals from setting up phoenix businesses. It is not, however, certain that this will happen as a body of respondents to an initial consultation rather tartly stated that HMRC should be required to use its existing powers more effectively, rather than seeking new ones.
The immediate concern for Insurers is that once again, the Government is seeking to use PII as a way to regulate a type of business and protect the public, ignoring its prima facie purpose of protecting the insured businesses themselves.
For those interested in providing this type of PII, identifying tax advisers may not be straightforward. The Government does not intend to include mere providers of tax services, such as payroll administrators and book-keepers, in its plans but will capture those carrying . Even when considering active providers of tax advice, the Government may need to create an exception to avoid catching organisations such as small charities, which often provide free tax advice to potential donors and bodies providing tax advice to those on low incomes.
Forcing Insurers into a regulatory role may also stifle creativity. Few Insurers today would voluntarily choose to underwrite firms advising individuals on the tax benefits of film finance schemes, yet many successful films, including Atonement, Avatar and Life of Pi were funded in this way. It may be difficult to determine if a tax arrangement is "highly artificial" or "highly contrived" until after the event and, of course, much tax advice seeks to exploit the complexity of UK tax legislation as well as legislative shortcomings. Insurers are likely to apply standards conservatively and there is a risk that some legitimate businesses may be unable to find cost effective cover.
In a hardening market, there is also a risk that the Insurance industry will reject the quasi regulatory role that Government is seeking to force upon it, by indicating that it is simply unwilling to cover the types of activity that Government would like to see covered. While this would drive many incompetent and unprofessional advisers out of the market, a form of kite mark involving minimum standards of education and continuing professional development could potentially achieve the same outcome at a lower cost to consumers.
The view of Caroline Colliston, Partner in DWF's Corporate Tax team is that "PII provides an important safety net for professional businesses offering tax advice as well as their clients. The Government appears to be considering using the insurance market as an addition to its armoury in the fight against tax avoidance and the dark arts of 'bad' tax advisers. Given the economic conditions we are facing the lure of increased short-term cash flow offered by some tax planning arrangements may prove too tempting for some businesses and individuals. The result could be an increase in businesses and individuals falling into the trap of paying for tax advice that is both bad and not insurance backed."