Why us? HMRC unleashes crackdown on barrister tax avoidance

The revenue has already set 30 of these intelligence-led investigations in motion across various trades since May 2011.

Reaction has been divided over whether the high-profile targeting of the legal profession is merited or just a stunt to scare a few more voluntary disclosure payments into its coffers.

This latest announcement from the HMRC came wrapped up in a glut of positive figures: HMRC has already bagged £50m in the last financial year from these specialist investigations teams and it fully expects to bring in a further £20m from this latest round (18 September 2012).

Scratch the surface and it turns out the majority of the recovered amount comes from other professions under scrutiny – Scottish mechanics, Geordie hairdressers and restaurateurs in the south east.

HMRC believes it can recover at least £3m from the legal sector, in targeting 300 high profile cases that would suggest an average yield of just £10,000 per case.

Yes, that figure will differ from lawyer to lawyer, but does it make HMRC dawn raids worthwhile?

Investigators point to the two cases that have come to court recently. Namely Rohan Pershad QC being charged with £600,000 tax fraud, an allegation he denies and, on Monday, barrister Edward Agbaje, charged with £81,000 VAT frauds over a number of years (28 August 2012), which he also denies.

With previous crackdowns HMRC has used information from third parties to correlate tax records. For example BUPA payments for private work done by doctors and dentists which could be cross-checked against declared income.

It will be interesting to see if the majority of those lawyers dug up by the revenue are predominantly legal aid funded or government instructed – suggesting HMRC has made the most of easily sourced information.

But it is not just about how much they are earning. There is a clear social appetite to see the hammer come down on wealthy tax avoiders.

BDO tax director Dawn Register believes it isn’t surprising that HRMC is looking at the legal sector, adding that the task force is a cost-effective way to target sectors.

“For barristers in particular, like MPs, there is lots of scope to claim various expenses, many of which are perfectly legitimate,” she says. “However there will be a small portion of people who have bent or broken the rules who should feel shaken by this announcement. As income and expenses are declared on a self-assessed basis, there is much more scope for error.

“It also goes without saying that many senior members of the profession earn significant money and with the trappings of wealth often come more complex tax affairs.”

One experienced barrister believes the MPs expenses scandal has focused minds on the bar and its seemingly generous allowances culture, but questions whether there are enough tax cheats to warrant a task force.

He said: “There have been cases of barristers getting into serious financial difficulty and being prosecuted for not paying their VAT liabilities. Since we moved to the system of being taxed on the value of work done, rather than income received, you end up being taxed on money you haven’t got and this can cause an enormous strain.

“The bar really is a soft target, the low lying fruit. In my own view it is outrageous and pathetic that the revenue should concentrate on this.

“The money they’ll get in will be miniscule after the labour costs.

“The bar is historically notorious for being a profession for inherited wealth. We are just getting to the stage where that is opening up, but that means when rates are cut, some barristers will really be struggling.

“You would think the revenue would get on with chasing big corporates for millions and billions.”

Tim Gregory, a partner with Saffery Champness agrees: “Whilst every walk of life has its bad eggs, only an exceptionally unusual lawyer would risk their livelihood by cheating the system, so it seems unlikely that there can be many for HMRC to investigate.

“It is absolutely right for the Government to be cracking down on people who break the rules, and taxpayers should all be pleased that they are doing so, but it seems unlikely that there could be much unpaid tax to be gleaned from the legal profession.”

Announcing the crack down, HMRC director general for enforcement and compliance Mike Eland declared: “This is not an empty threat”.

The Bar Council,however, was miffed by the attack. Chair Michael Todd QC said the profession added billions annually to UK plc. Why should they be targeted?

“We were unaware, until yesterday, that HMRC had specific concerns about the tax affairs of lawyers,” Todd said on Tuesday (18 September). “We are concerned that HMRC has chosen to proceed in this manner, rather than using the channels of communication with the relevant professional bodies, which have always been open.”

Concerned though the Bar Council might be, it is happening. With two prosecutions being lined up against barristers it is clear that HMRC is serious. Time to call in the accountants.