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  • Background – Professional Conduct in Relation to Tax, GAAR and the Enablers of Defeated Tax Avoidance rules

    Professional guidelines are perhaps not the most exciting topic for an article. Furthermore, professional guidelines about tax are probably about as far from exciting as one could possibly envisage.

    However, for those of you who have stayed with me, there are important changes afoot for tax advisers of all persuasion from 1 March 2017.

    Much has been made of HMRC’s stand-alone proposals targeted at Enablers of Defeated Tax Avoidance schemes (“Enabler Rules”), a set of provisions that are essentially designed to sit alongside the General Anti-Abuse Rule (“GAAR”).

    The difference between the GAAR and the Enabler Rules is that the new Enabler Rules target the manufacturers, marketers and crucial participants of abusive tax schemes whereas the GAAR is aimed at the users. Under the Enabler Rules, where there is an abusive scheme, that scheme fails and where someone is found to be ‘an enabler’ then they are subject to a penalty regime.

    My view is that the revisions to the Professional Conduct in relation to tax rules are likely to be of greater import to the professional end of the tax market. In other words for those who operate under the auspices of the Chartered Institute of Taxation, are members of the Society of Trust and Estate Practitioners (“STEP”) and / or those who are members of an accountancy body.

    Note, these rules are unlikely to apply to a lawyer, unless he or she is also a card carrying member of one of these bodies.

    Of course, those who are operating outside of these professions (and are not covered by a different regulator imposing similar guidelines) are not covered by these new rules. Some, and I won’t say all, may also feel that the enabler provisions are just another hurdle to be taken in their stride. The result being that the targeted worst excesses of the market are not actually impacted in practice.

    I suppose time will reveal all.

    What is professional conduct in relation to taxation?

    This is a reasonably thorough document which covers all aspects of a tax adviser’s work. It provides guidance, principles and the standards by which the tax adviser should operate. There are large chunks of this document which are not relevant to this article.

    The focus of this article will begin with Section 4, which relates to tax advice.

    Tax evasion v tax planning v tax avoidance

    As by way of preamble, the document sets out the difference between tax evasion, tax planning and tax avoidance.

    Clearly it sets out that a member should not knowingly be involved in tax evasion – however it may of course be appropriate for a tax adviser to help regularise a client’s affairs where he has, say, not disclosed income in previous years.

    The document then asserts, rather obviously, that tax planning is perfectly legal and that taxpayers “are entitled to enter into transactions that reduce tax or to take interpretation of legislation that HMRC may not agree with“. It goes on to say that that although HMRC may wish to challenge these transactions it is “ultimately only the courts [that] can determine whether [a] particular piece of tax planning is legally effective or not“.

    The document then comments that some tax strategies, albeit legal, have promoted “heated public debate” and “raised ethical challenges”.

    It then goes on to discuss tax avoidance through the prism of tax planning versus tax avoidance.

    The tax planning continuum

    The document begins to hit the nail on the head when it states that the Court has found it difficult to elucidate a definition of tax avoidance and how to “distinguish this from acceptable tax planning or mitigation“.

    It notes that the public use (Including the press) of the term avoidance is also counter-productive. It is a term which has been used by the press to describe a whole range of activities – from the cross border arrangements of large international groups to copy and paste, highly artificial tax schemes.

    The Oxford University Centre for Business Taxation stated in its paper published in 2012 quite correctly noted that transactions cannot generally be dropped down one of these three convenient funnels. It is worth pointing out that both press and politicians tend to use just two funnels – avoidance and evasion. For example senior ministers of the Conservative government (and I am sure of other political and non-political hues!) have described putting money in to an ISA or contributing to a pension scheme as ‘tax avoidance’. This is clearly wrong and also confusing.

    The paper suggests that it is better to think of the position as:

    a continuum from transactions that would not be effective to save tax under the law as it stands at present to tax planning that will be accepted by HMRC and courts without question

    What do HMRC make of this? If one was being rather ebullient, one might not care what HMRC thinks of tax avoidance. It is, after all, the Court’s job to determine what is, and what is not legal and acceptable. However bearing in mind that HMRC are likely to be the ones that challenge any tax structure it clearly makes sense to understand what their view of avoidance is.

    In their paper Tackling Tax Evasion and Avoidance  issued in March 2015 HMRC set out their view as follows:

    “tax avoidance involves bending the rules of the tax system to gain a tax advantage that Parliament never intended. It involves contrived, artificial transactions that serve little or no purpose other than to produce this advantage. It involves operating within the letter-but not the spirit-of the law”

    Another of their documents called Tempted by Tax Avoidance sets out some features which may be characteristic of a tax avoidance scheme – the intention being to put on guard a taxpayer or adviser who recognises any such features.

    These characteristics are:

    • if it sounds too good to be true it probably is;
    • tax results that are out of proportion with the commercial or economic risk of activity;
    • over complexity, artificial or contrived steps, or circular flows of money;
    • the involvement of offshore entities of tax havens for no good reason;
    • the presence of confidentiality agreements, and
    • the arrangements being given a scheme reference number (“SRN”) under the Disclosure of Tax Avoidance Scheme rules (“DOTAS”)

    Rather helpfully(!!!), we are then told that the presence of these features does not necessarily mean the transaction is tax avoidance. It then gives an example how a commercial transaction could be issued with an SRN under the DOTAS rules yet still be described as “inoffensive”.

    So even if an adviser was to take the view he or she must not be involved in tax avoidance it remains difficult to draw the line and, importantly, to remain the right side of it with complete certainty. An accountant could very easily decide to take the view that he is not going to provide any tax advice (other than the absolute basics). Of course, this is a commercial decision as much as anything else.

    But what about those who want to provide added value tax advice to Clients? Does the guidance provide any other…errr…guidance on what can and can’t be done?

    The standards for tax planning

    We now need to thumb backwards through the Professional Conduct in Relation to Tax to section 2. Towards the end of section 2 the document sets out The Standards for Tax Planning. This is a major addition to the latest version of this document.

    In setting out these standards we are told that the motivation behind such changes is to protect the reputation of member, the wider profession and also to ensure that public interest concerns are met. Of course, this is a laudable aim.

    The standards are as follows:

    1. Client specific;
    2. lawful;
    3. disclosure and transparency;
    4. tax planning arrangements;
    5. professional judgement and appropriate documentation

    For the purposes of this article I would like to concentrate on bullet 4. As we seen above, determining the acceptability or otherwise of tax planning can be a grey area. If we adopt Oxford University’s continuum or spectrum, we need to answer:

    • Whereabouts does a piece of advice reside on the continuum?;
    • where on the continuum does one draw the line in terms of acceptability?; and
    • which side of that line does the planning fall?

    Does the new tax planning standard assist with these questions?

    We are told that:

    “members must not create, encourage or promote tax planning arrangements or structures that i) Set out to achieve results that are contrary to the clear intention of Parliament in enacting relevant legislation and/or ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation.”

    What does this mean? Let us deconstruct it.

    Well, the first part clearly is a warning that an adviser should not be involved in either the design or the marketing of certain tax structures. Sorry to state the obvious. However, there is a qualification. The question is what type of tax structures are verboten?

    When assessing the type of structure one cannot advise upon (or encourage or promote) one must have regard to two limbs.

    The first limb involves identifying the clear intention of Parliament. Now determining what the intention of Parliament is, in itself, quite difficult. One might take the view that the intention of Parliament was precisely what was written down in the legislation. However, we now know this to be very naive! Secondly, Parliament takes a ludicrously short period of time to pass increasingly voluminous and verbose volumes of new tax legislation. So there is generally little to glean from their debating of these measures.

    However the use of “clear” is helpful. If there is no clear intention of Parliament to be determined than I would suggest it is not possible to breach this limb. Of course, one needs to take a reasonable view when assessing the clear intention of Parliament.

    The second limb means that one should not be involved where structure is highly artificial or highly contrived and seeks to exploit shortcomings or loopholes in the legislation.

    Comparison of Professional Conduct in relation to tax with GAAR and Enablers Rules?

    A pertinent question is how these prohibitions interact with GAAR and the Enablers Rules – the two big legislative beasts in this area. Of course, for neither, do we have any precedent. Instead we have untested legislation in the case of the former and draft legislation in the case of the latter.

    Both of these relate only to ‘abusive’ tax arrangements and the definition is, to all intent and purposes, a consistent one. The Professional Conduct in Relation to Tax is not couched precisely in these terms. However, there are some parallels to be drawn

    Limb one talks about the structuring being contrary to the clear intention of Parliament. This is similar to the ‘spirit of parliament test’ (see my earlier article) which is something that one must have regard to under GAAR and the Enablers Rules when determining whether there is an abusive tax arrangement.

    Limb two, alternatively or cumulatively with limb one, will be triggered if there is a ‘highly artificial’ or ‘highly contrived’ scheme and seeks to exploit shortcomings or loopholes in the legislation.

    I refer to these as the ‘loophole test’ and ‘abnormal test’ in my earlier article. Again, we therefore see a loose reflection with GAAR and the Enablers Rules. The ‘abnormal’ test in the professional conduct rules in relation to taxation is slightly higher (one presumes) as the scheme would need to be ‘highly contrived’ or ‘highly artificial’. However, I am not sure that anyone would want to work on the basis that there planning was merely artificial rather than highly artificial.

    One can therefore see that it is arguable that the Professional Conduct in Relation to Tax rules will only engage to target the same mischief that GAAR and the Enablers Rules is addressed.

    It is worth noting that HMRC have confirmed that they anticipate if one is acting within the Professional Conduct in Relation to Tax rules then the Enablers Rules should not apply.

    What if not sure?

    What should an adviser do if they remain unsure –ie if they think that they are operating towards the margins? The Professional Conduct in Relation to Tax guidelines encourage the adviser to use his professional judgement (which needs to be a reasonable judgement) and to document appropriately.

    In addition, clearly, the Client should be advised that they are pushing at the edges of what is acceptable and the inherent risks of doing so.

    Conclusion – Professional conduct in relation to tax

    My view is that we remain no closer to determining what constitutes tax avoidance as a result of this document. We merely have a commentary. However, it is probably not the professional bodies’ job to define such a term.

    However, in my view, if one dissects the content of the guide what we can see is that the line drawn on the continuum is the same one which is drawn where defining what is ‘abusive’ under GAAR and for the purposes of the enablers legislation.

    As such if one keeps the right side of the line then:

    • Your clients will not have issues with the GAAR;
    • You will not have problems with the enablers legislation; and
    • You will not face problems from a professional disciplinary.

    Conversely, if one ends up the wrong side of the line then there is the potential for an unfortunate domino rally to be precipitated!

    Of course, and this is the real danger, until we have cases under GAAR (and consequently perhaps under the Enablers Rules) we do not know precisely where that line is drawn!


    If you have any queries surrounding the Professional Conduct in Relation to Tax (or indeed the Enablers Rules or GAAR) then please get in touch.