Raising standards in the tax advisory market

This article was first published by Taxation magazine on 3 June 2024.

On 6 March 2024, HMRC published a consultation on improving standards in the tax advisory market. Improving standards in our industry has been a repeated idea over the last few years. After various ‘scandals’ emerged – including advisers continuing to promote tax avoidance schemes, issues around repayment agents, to name a few referenced in the consultation – it is clear that some sort of action needs to be taken. The question is what action and by whom.

Identifying the problem

HMRC has identified problems in the industry as being issues “with substandard and unscrupulous tax advice…[including] problems relating to professional standards” and concludes that “professional body membership improves compliance, but on its own is probably insufficient”. However, the consultation also states that “Most tax practitioners who provide tax advice and services are competent and adhere to professional standards; however, the government’s call for evidence on raising standards in the tax advice market (2020) has shown there is a minority of practitioners who are incompetent, unprofessional or unscrupulous”.

My first concern with this statement of the problem is that the issues are inherently subjective. Everyone has a moral compass, but what it ‘acceptable’ (say, tax avoidance) for one person may be ‘unacceptable’ (fraud) to another. Is HMRC trying to regulate our ethics?

We can all agree that substandard advice is incorrectly advising a taxpayer on what the legislation says or assisting them to evade tax. However, if HMRC disagrees with an adviser’s interpretation of the legislation, is this substandard advice?

The data that HMRC bases the above conclusion on shows that there is far more non-compliance taking place by taxpayers with unregulated advisers, though there is still non-compliance even when taxpayers are advised by regulated advisers. The data analysis does not define ‘non-compliance’, which could therefore range from transposition errors to differences in interpretation of the legislation, later resolved in HMRC’s favour or even a taxpayer failing to make their adviser aware of an income stream. The data does not specify the tax impact of the errors either so we cannot determine whether the value of the error differs depending on whether an adviser is regulated.

The role of professional bodies

All professions have their share of poor quality advisers and professional bodies are there to address this. Membership of a professional body means that we are regulated by them and required to adhere to certain professional conduct rules, ethically and technically. With all professions, however closely an industry is regulated, there will always be a few who slip through the gaps.

As an aside, it is hypocritical of HMRC to suggest that membership of a professional body is insufficient to maintain standards in the tax advice market when the PAC has recently castigated HMRC for its poor service levels (https://committees.parliament.uk/publications/43549/documents/216398/default/)?

The consultation states that HMRC has the power to take action against unscrupulous advisers including “powers to wind up companies promoting tax avoidance, issue Stop Notices more quickly to prohibit the promotion of tax avoidance, and new powers to publish details of promoters and their schemes, to disrupt the promoter market and support taxpayers in identifying schemes so that they can steer clear of or exit them. …[and] powers enabling HMRC to act more quickly to disqualify directors of companies involved in tax avoidance”

If these powers were used appropriately, then the market for poor quality advice and promotion of avoidance schemes would be greatly reduced. This would also increase trust in the tax advisory industry.

HMRC can also refer regulated advisers to their professional bodies and the consultation discusses the various repercussions that can fall on regulated advisers, from reprimands to being struck-off.

Rasing standards should go hand in hand with raising awareness amongst the general public about what to look for in their tax advisers. There appears to be an assumption that anyone calling themselves an accountant or tax adviser is professionally qualified. In 2008, Sir Vince Cable tabled a motion to protect the term accountant (https://edm.parliament.uk/early-day-motion/36272) on the basis that “thousands of small businesses and individuals, believing they have engaged qualified accountants, are at risk from harmful and costly business advice … [and] … “legal protection of title is viewed as essential in professions where there is a substantial degree of public interest”. Is there sufficient public interest now for the term ‘tax adviser’ to be protected? If so, we then need to look at what exactly defines tax advice.

The consultation attempts to address this by looking at the scope of who should be regulated and considers that it should be those who interact with HMRC. For those promoting tax avoidance schemes however, it is fairly straightforward to get around this – prepare tax returns for the client and ask the client to file them using HMRC software. When appealing HMRC decisions regarding the arrangements, the adviser can draft letters for the taxpayer to send to HMRC personally.. I believe that restricting the scope in this way will undermine the tax profession further by differentiating between those who interact with HMRC and those who do not, with the implication that those who do not interact with HMRC are perhaps less competent.

Agent registration with HMRC

In the consultation, HMRC proposes that any agent wishing to interact with HMRC completes a registration form to check they are regulated for AML purposes and is up to date with their own tax affairs. However, this is unsatisfactory for several reasons:

• It does not prevent someone selling aggressive tax avoidance schemes
• Agents represent clients, often against HMRC. If HMRC is seen to be regulating the profession, this will automatically result in a conflict of interest between the agent protecting their own interests and that of their client.
• Compliance with AML requirements and being up to date with their own tax affairs does not mean that a person is a competent adviser. For example, one London accountant stated that “I’ve been too busy submitting my clients’ tax returns” when they filed their own return late ( https://www.gov.uk/government/news/revenue-reveals-top-10-oddest-excuses-for-late-tax-returns). The consultation concedes that “While [mandating registration] by itself is unlikely to fundamentally raise standards in the tax advice market, it would be an essential enabler for a strengthened regulatory framework”. It is unclear how mandating registration would improve standards of advice.
• It is also unclear what ‘interaction’ means. Is it filing tax returns? What about writing to HMRC on behalf of a client, without using any of HMRC’s online services?

The consultation made the following suggested approaches
to strengthening the regulatory framework:

• Mandatory professional body membership – the majority of tax advisers are regulated, however there are some who are ‘qualified by experience’ and unlikely to want to take more exams. A requirement like this may push more experienced advisers out of the profession – much as has happened in HMRC – and leave junior staff without that expertise to draw on. If this becomes mandatory, professional bodies may need to consider adjusting their entry and oversight models to take advisers in this position into account. In any case, HMRC should not determine what standards professional bodies should impose on members.
• Joint HMRC-industry enforcement – The suggestion here is that HMRC along with existing professional bodies will supervise tax advisers. Where an unregulated person is providing tax advice, they will automatically be regulated by HMRC. The points that immediately come to mind here are
  a) with HMRC as under-resourced as it is, will the department have the resources to provide adequate supervision? If not, then when/if advisers supervised by HMRC provide sub-standard advice, are taxpayers protected because the adviser was regulated by HMRC? What about those who promote tax avoidance schemes, using their regulation by HMRC as a way to obtain more clients?
  b) HMRC is almost always on the opposite side to tax advisers and should not be the body regulating them. Indeed, asking HMRC to assist with regulation of the tax advisory market is like asking the CPS to help regulate criminal defence lawyers.
• Regulation by a government body – The suggestion is that a government body sets, monitors and enforces standards in the tax advice market and it does sound like a lot of work for little return. Those who don’t want to would simply not register and those who are already regulated swap one regulator for another. This could work if it became the default option for those not already regulated.

Interestingly, regulation by a body independent of the government (aside from the existing professional bodies) like the FCA was not suggested.

Under the AML provisions, advisers that are not regulated by a professional body must register with HMRC (https://www.gov.uk/guidance/money-laundering-regulations-accountancy-service-provider-registration). Rather than requiring the entirety of the tax profession to jump through additional hoops, the Government can in the same way mandate that any unregulated advisers must register with [a relevant third party or independent body] or face specified consequences. These consequences should be seen to be implemented quickly. This achieves a fully regulated profession.

In conclusion

Ultimately, the government can mandate what it wants, but it needs to remember that the minority of “incompetent, unprofessional or unscrupulous” advisers are unlikely to comply. Trust is increased in the profession if unregulated advisers that continue to act are forced to face such consequences.

The issues in the tax advisory market are not just the ‘fault’ of the private sector. HMRC itself has come under a lot of criticism for the loan charge, its debt management and ‘customer’ service (https://committees.parliament.uk/publications/43549/documents/216398/default/), how R&D claims are being enquired into (https://www.tax.org.uk/r-d-tax-relief9https://feweek.co.uk/hmrc-under-fire-from-ofsted-over-apprenticeships-fiasco/-crackdown-deterring-genuine-claims-institute-warns) and the lack of training for staff. Arguably, the ‘unscrupulous’ advisers are simply taking advantage of the perceived shortcomings in the department – a six of one, half a dozen of the other situation?

With this in mind, restoration of trust in the system means that regulation is on its way. If HMRC has any role to play in regulation, it is likely to undermine trust in the system further. Whilst regulation of the tax advisory market is not to be dismissed out of hand, the body carrying out the consultation and implementing any regulation should not be HMRC.

An independent body regulating both HMRC and the private sector – in effect treating HMRC as any other organisation – would demonstrate the importance of high standards of tax advice as well as providing a route any complaints.

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