Avoid traps of tax crackdown

The legitimacy of tax avoidance is under the spotlight. HMRC has enjoyed considerable success in challenging claims for tax relief of late, with a notable example being the refusal of tax relief to investors in the Eclipse 35 film investment partnership. Furthermore, proposals recently announced by Treasury minister David Gauke, which could see tax advisers forced to hand over to HMRC the names of clients involved in aggressive tax avoidance schemes, represent a further example of the Government trying to find ways to clamp down on tax avoidance. Evidently, the line between unacceptable tax avoidance schemes, and acceptable tax planning practices is shifting.

Against this background, clients will inevitably be seeking reassurance that the tax planning advice they have received previously remains sound. Professional tax advisers, including lawyers and barristers, need to tread carefully when clients raise questions and concerns.

At the outset, where a client seeks a reaffirmation of tax advice they have previously received, advisers should avoid giving off-the-cuff advice about matters they have not reviewed for some time. The original advice may now need to be revised or caveated in light of more recent developments in relevant regulation, legislation or common law. Furthermore, before providing any additional advice, the professional adviser must consider its professional and regulatory obligations and, in particular, whether the adviser has the necessary objectivity to do so. If there is any doubt, the adviser should proceed very cautiously, with assistance from professional indemnity insurers and legal advisers as necessary, to avoid creating further problems.

Advisers should always be prepared for a client’s initial queries to evolve into a formal complaint or claim. The adviser should avoid creating documents that might subsequently prove unhelpful in the context of a future claim. If a client expresses concern about advice received, the adviser should think carefully before trying to placate the client with swift assurances. If the subject matter of the concern is not carefully considered first, this may only create further problems and may cause the client to suffer additional losses, such as penalties and interest charges on tax found to be due. At the outset, the adviser must consider the obligations owed to insurers and, in particular, any requirement to report to insurers the existence or awareness of circumstances that may give rise to a claim – which may be some time before a claim is actually made.

Upon receiving a formal complaint or claim, the adviser should seek assistance from insurers and legal advisers to ascertain how best to respond to it. All hard copy and electronic documentation relevant to the subject matter of the complaint will need to be immediately preserved. It is also important to create a privileged environment in which advice can be received and considered in such a way that it will not become disclosable in any future litigation. Insurers and legal advisers can assist with this.

Senior associate Tim Shepherd assisted with this article