The introduction by seven professional bodies of tax planning standards to their guidelines on professional conduct in relation to taxation responds to ministerial concern that the professions are not doing enough to curb tax avoidance. The standards build on familiar fundamental principles of professional conduct and in many respects offer new guidance for ‘best practice’ in advising on tax planning arrangements. However, in attempting to outlaw the creation, encouragement or promotion by members of certain undefinable tax planning arrangements, the professional bodies have gone beyond what is legitimately the subject matter of the PCRT.
This 1 March saw a revised version of the Professional conduct in relation to taxation (PCRT) come into effect for members of the Chartered Institute of Taxation. CIOT members were notified of the revised guidance on 1 November last year. In his message to members at that time, Bill Dodwell, the current CIOT president, drew attention to ‘some significant changes which are being made to ethical guidelines for CIOT members in respect of tax planning’.
The changes are designed in part to respond to the challenge by Treasury ministers in March 2015 that the professional bodies ‘take on a greater lead and responsibility in setting and enforcing clear professional standards around the facilitation and promotion of avoidance to protect the reputation of the tax and accountancy profession and to act for the greater public good’. As a result, the new guidelines have been agreed by and apply to members of seven professional bodies: the English and Scottish Chartered Accountant Institutes, the ACCA, AAT, ATT, CIOT and STEP.
On 1 November last, Jane Ellison, the financial secretary to the Treasury, wrote to congratulate the seven bodies on their commitment to responsible tax planning. In her letter, the FST noted that: ‘There is a shared goal between us on this matter and in this context we should do our utmost to ensure there is a continued shift in attitudes. We will need to keep the PCRT under review to check the extent to which the revised principles are having the impact we are all seeking.’ At the same time, the CIOT published various Q&As offering some further background to the changes.
On 14 February, CIOT and ATT members were invited to participate in a webinar on the PCRT, in which Bill Dodwell and John Cullinane, the CIOT tax policy director, were to discuss the new guidelines on tax planning and how they should be applied and answer members’ questions. The webinar is still available to view; however, those who are seeking clarity on the controversial aspects of the new guidelines should be prepared to be disappointed with its content.
Part 2 of the PCRT sets out the fundamental principles that apply to CIOT members: integrity, objectivity, professional competence and due care, confidentiality and professional behaviour (e.g. avoiding action that brings the profession into disrepute). These are long established principles governing professional conduct, not just in the tax field. In passing, it is worth noting that two of the fundamental principles are in fact put in issue by the current government proposals to introduce enabler penalties.
‘Objectivity’ requires a member to ensure that bias, conflict of interest or undue influence should not override his professional judgment, for example, in advising his client. The threat to an adviser of an enabler penalty, based on arrangements into which his client has chosen to enter, inevitably creates the scope for conflict between the adviser’s interests and those of his client.
‘Confidentiality’ requires that a member may not disclose information without his client’s consent, but disclosure may be the only way in which an adviser may defend himself effectively against the threat of an enabler penalty. The new tax planning standards raise similar issues, having regard to the risk of disciplinary action. If the professional bodies concerned with PCRT thought that their new standards for tax planning would spare their members the risk of enabler penalties, their hope or belief was misplaced.
The standards for tax planning that now appear in Part 2 of the PCRT are new: these are standards ‘that members must observe when advising on UK tax planning’. They build upon and supplement the fundamental principles. But what are these new standards?
The first standard is that tax planning must be specific to the particular client’s facts and circumstances (‘the client specific standard’). It appears, however, that this should not be taken literally. In particular, para 2.33 recognises the possibility of a generic opinion or advice, provided for example that it adopts reasonable and realistic assumptions and draws attention to the need to seek further advice if these are not borne out or circumstances change.
The second standard is that members must act lawfully and with integrity and expect the same from their clients (‘the lawful standard’). In particular, tax planning should be based on a realistic assessment of the facts and on a credible view of the law; or, to express the same sentiment in the negative, tax planning should not be based on an unrealistic assessment of the facts or an incredible view of the law. This requires, as indeed most of Part 2 of the PCRT does, the exercise of professional judgment. What is realistic and, based on the realistic, what is credible may depend upon what is known to the person in question, which may have to be established. As a standard to which one should seek to adhere, however, there seems little to object to in the suggestion that tax planning should be based on such assessments and views or, at least, should not be based on what is unrealistic and incredible.
The third standard is that tax advice must not rely for its effectiveness on HMRC having less than the relevant facts; and that any disclosure must fairly represent all relevant facts (‘the disclosure and transparency standard’). Disclosure, and the standards applicable to disclosure, are topics on which there is an abundance of authority, both within the tax field and outside it. The further explanation of this standard in para 2.36 suggests that ‘fuller disclosure’ should perhaps be recommended to clients in particular cases. This presumably is intended to mean that one should recommend disclosure in those cases where the material is of doubtful relevance, rather than that one should recommend bombarding HMRC with irrelevant material.
The explanation recognises that: ‘What is actually to be disclosed will inevitably reflect a professional judgment taking into account all relevant facts and law specific to the case in question’. It then adds, ‘and what the client consents should be disclosed’. As this indicates, ultimately the two parts of the disclosure and transparency standard have a different focus. The first part is within the member’s control, being the basis on which he advises. The second part is not: ultimately, a member might presumably have to cease to act for a client who does not agree to the disclosure that a member considers is needed to fairly represent all the relevant facts.
It is the next standard that is the most controversial: ‘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.’
In the webinar, John Cullinane emphasised that the opening words – ‘create, encourage or promote’ – should not be ignored. Members should assume, therefore, that they aim to provide a flavour of the action that is intended to fall within this standard. They are not, however, words the scope of which is easily determined. In particular, the words describe the action of creation, encouragement or promotion, but they offer no guidance as to how far those concepts go. In particular, they do not seek to impose any standard by reference to which to judge whether the action is, in PCRT terms, good or bad. Thus, we can reach a judgement as to whether something is done honestly, with integrity or fairly, or whether it is realistic or credible, without necessarily having to classify finally the action in question. In this case, members must decide whether particular actions are of a particular type or have particular consequences.
No greater clarity emerges from looking at what it is that one must not create, encourage or promote. According to Bill Dodwell in the webinar, members may have regard to the approved GAAR Panel guidance for the purposes of the tax planning arrangements standard; although, as he emphasised, that standard does not impose the same test as the GAAR. Leaving aside any consideration of the GAAR, it is evident from the articulation of the standard that it contemplates that arrangements can exploit shortcomings in the legislation and can do so even if the arrangements are artificial or contrived, but not if they are ‘highly artificial’ or ‘highly contrived’. There is no clarity in that.
The lawful standard requires that tax planning ‘should be based on a realistic assessment of the facts and on a credible view of the law’. What then does the tax planning standard add to the matter? What is it designed to prohibit at risk of disciplinary action? If something must be ‘contrary to the clear intention of Parliament in enacting relevant legislation’, and if the intention of Parliament is to be discerned from the legislative words, once one has arrived at a credible view of the law there is surely limited or possibly no scope to conclude that the result is contrary to Parliament’s intentions, such that a member is prohibited from creating, encouraging or promoting it. Is Parliament not to be assumed to have intended the result for which a credible view of the relevant legislation provides?
It is not the purpose of this short article to engage purely in a critical or semantic dissection of the language of these new PCRT standards. Members must make sense of them as best they can. The Q&A published in November last year indicated that the professional bodies had tested with HMRC how the new principles would apply to various real and illustrative situations. There seems no good reason why those examples should not be published, so that members might have a better insight into what the professional bodies and HMRC think the tax planning arrangements standard might mean.
The point, as the concluding new standard makes explicit, is that: ‘Applying professional standards to particular client advisory situations requires members to exercise professional judgement on a number of matters.’ The essential problem with the tax planning arrangements standard is that at its heart it is seeking to prohibit members from doing certain ill-defined things, rather than seeking to establish and apply uniform, recognisable and verifiable professional standards to what they do.
The appeal to public interest concerns as a basis for the promulgation of such standards is of little assistance because there is no uniform or coherent view of what ‘public interest concerns’ really are. Each client is able to take his own view of what he thinks they are and how they may impact upon his tax planning circumstances. Ultimately, however, members are engaged to serve the interests of their clients and not the public at large.
Ministers may like to think that the professions should take on a greater lead and responsibility in relation to tax avoidance, but in fact avoidance is a function of the tax laws that ministers promote and that Parliament enacts. As the Memorandum of Dissent to the Royal Commission on the Taxation of Profits and Income noted more than 60 years ago: ‘The existence of widespread tax avoidance is evidence that the system, not the taxpayer, stands in need of radical reform.’ And the reference to the taxpayer could have included a reference to those whose job it is to advise taxpayers on their tax obligations, based on a realistic assessment of the facts and a credible view of the law. It is for ministers and parliamentarians to look to what they do, rather than to look to the professions to relieve them of responsibility for the errors and inadequacies of their tax policy and tax legislation.
For the revised professional conduct rules and related materials, see www.bit.ly/2e1qZer. An article on this topic explaining the CIOT and ICAEW view, by the Bill Dodwell and Nick Parker, was published in our sister publication, Taxation magazine, here.
The introduction by seven professional bodies of tax planning standards to their guidelines on professional conduct in relation to taxation responds to ministerial concern that the professions are not doing enough to curb tax avoidance. The standards build on familiar fundamental principles of professional conduct and in many respects offer new guidance for ‘best practice’ in advising on tax planning arrangements. However, in attempting to outlaw the creation, encouragement or promotion by members of certain undefinable tax planning arrangements, the professional bodies have gone beyond what is legitimately the subject matter of the PCRT.
This 1 March saw a revised version of the Professional conduct in relation to taxation (PCRT) come into effect for members of the Chartered Institute of Taxation. CIOT members were notified of the revised guidance on 1 November last year. In his message to members at that time, Bill Dodwell, the current CIOT president, drew attention to ‘some significant changes which are being made to ethical guidelines for CIOT members in respect of tax planning’.
The changes are designed in part to respond to the challenge by Treasury ministers in March 2015 that the professional bodies ‘take on a greater lead and responsibility in setting and enforcing clear professional standards around the facilitation and promotion of avoidance to protect the reputation of the tax and accountancy profession and to act for the greater public good’. As a result, the new guidelines have been agreed by and apply to members of seven professional bodies: the English and Scottish Chartered Accountant Institutes, the ACCA, AAT, ATT, CIOT and STEP.
On 1 November last, Jane Ellison, the financial secretary to the Treasury, wrote to congratulate the seven bodies on their commitment to responsible tax planning. In her letter, the FST noted that: ‘There is a shared goal between us on this matter and in this context we should do our utmost to ensure there is a continued shift in attitudes. We will need to keep the PCRT under review to check the extent to which the revised principles are having the impact we are all seeking.’ At the same time, the CIOT published various Q&As offering some further background to the changes.
On 14 February, CIOT and ATT members were invited to participate in a webinar on the PCRT, in which Bill Dodwell and John Cullinane, the CIOT tax policy director, were to discuss the new guidelines on tax planning and how they should be applied and answer members’ questions. The webinar is still available to view; however, those who are seeking clarity on the controversial aspects of the new guidelines should be prepared to be disappointed with its content.
Part 2 of the PCRT sets out the fundamental principles that apply to CIOT members: integrity, objectivity, professional competence and due care, confidentiality and professional behaviour (e.g. avoiding action that brings the profession into disrepute). These are long established principles governing professional conduct, not just in the tax field. In passing, it is worth noting that two of the fundamental principles are in fact put in issue by the current government proposals to introduce enabler penalties.
‘Objectivity’ requires a member to ensure that bias, conflict of interest or undue influence should not override his professional judgment, for example, in advising his client. The threat to an adviser of an enabler penalty, based on arrangements into which his client has chosen to enter, inevitably creates the scope for conflict between the adviser’s interests and those of his client.
‘Confidentiality’ requires that a member may not disclose information without his client’s consent, but disclosure may be the only way in which an adviser may defend himself effectively against the threat of an enabler penalty. The new tax planning standards raise similar issues, having regard to the risk of disciplinary action. If the professional bodies concerned with PCRT thought that their new standards for tax planning would spare their members the risk of enabler penalties, their hope or belief was misplaced.
The standards for tax planning that now appear in Part 2 of the PCRT are new: these are standards ‘that members must observe when advising on UK tax planning’. They build upon and supplement the fundamental principles. But what are these new standards?
The first standard is that tax planning must be specific to the particular client’s facts and circumstances (‘the client specific standard’). It appears, however, that this should not be taken literally. In particular, para 2.33 recognises the possibility of a generic opinion or advice, provided for example that it adopts reasonable and realistic assumptions and draws attention to the need to seek further advice if these are not borne out or circumstances change.
The second standard is that members must act lawfully and with integrity and expect the same from their clients (‘the lawful standard’). In particular, tax planning should be based on a realistic assessment of the facts and on a credible view of the law; or, to express the same sentiment in the negative, tax planning should not be based on an unrealistic assessment of the facts or an incredible view of the law. This requires, as indeed most of Part 2 of the PCRT does, the exercise of professional judgment. What is realistic and, based on the realistic, what is credible may depend upon what is known to the person in question, which may have to be established. As a standard to which one should seek to adhere, however, there seems little to object to in the suggestion that tax planning should be based on such assessments and views or, at least, should not be based on what is unrealistic and incredible.
The third standard is that tax advice must not rely for its effectiveness on HMRC having less than the relevant facts; and that any disclosure must fairly represent all relevant facts (‘the disclosure and transparency standard’). Disclosure, and the standards applicable to disclosure, are topics on which there is an abundance of authority, both within the tax field and outside it. The further explanation of this standard in para 2.36 suggests that ‘fuller disclosure’ should perhaps be recommended to clients in particular cases. This presumably is intended to mean that one should recommend disclosure in those cases where the material is of doubtful relevance, rather than that one should recommend bombarding HMRC with irrelevant material.
The explanation recognises that: ‘What is actually to be disclosed will inevitably reflect a professional judgment taking into account all relevant facts and law specific to the case in question’. It then adds, ‘and what the client consents should be disclosed’. As this indicates, ultimately the two parts of the disclosure and transparency standard have a different focus. The first part is within the member’s control, being the basis on which he advises. The second part is not: ultimately, a member might presumably have to cease to act for a client who does not agree to the disclosure that a member considers is needed to fairly represent all the relevant facts.
It is the next standard that is the most controversial: ‘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.’
In the webinar, John Cullinane emphasised that the opening words – ‘create, encourage or promote’ – should not be ignored. Members should assume, therefore, that they aim to provide a flavour of the action that is intended to fall within this standard. They are not, however, words the scope of which is easily determined. In particular, the words describe the action of creation, encouragement or promotion, but they offer no guidance as to how far those concepts go. In particular, they do not seek to impose any standard by reference to which to judge whether the action is, in PCRT terms, good or bad. Thus, we can reach a judgement as to whether something is done honestly, with integrity or fairly, or whether it is realistic or credible, without necessarily having to classify finally the action in question. In this case, members must decide whether particular actions are of a particular type or have particular consequences.
No greater clarity emerges from looking at what it is that one must not create, encourage or promote. According to Bill Dodwell in the webinar, members may have regard to the approved GAAR Panel guidance for the purposes of the tax planning arrangements standard; although, as he emphasised, that standard does not impose the same test as the GAAR. Leaving aside any consideration of the GAAR, it is evident from the articulation of the standard that it contemplates that arrangements can exploit shortcomings in the legislation and can do so even if the arrangements are artificial or contrived, but not if they are ‘highly artificial’ or ‘highly contrived’. There is no clarity in that.
The lawful standard requires that tax planning ‘should be based on a realistic assessment of the facts and on a credible view of the law’. What then does the tax planning standard add to the matter? What is it designed to prohibit at risk of disciplinary action? If something must be ‘contrary to the clear intention of Parliament in enacting relevant legislation’, and if the intention of Parliament is to be discerned from the legislative words, once one has arrived at a credible view of the law there is surely limited or possibly no scope to conclude that the result is contrary to Parliament’s intentions, such that a member is prohibited from creating, encouraging or promoting it. Is Parliament not to be assumed to have intended the result for which a credible view of the relevant legislation provides?
It is not the purpose of this short article to engage purely in a critical or semantic dissection of the language of these new PCRT standards. Members must make sense of them as best they can. The Q&A published in November last year indicated that the professional bodies had tested with HMRC how the new principles would apply to various real and illustrative situations. There seems no good reason why those examples should not be published, so that members might have a better insight into what the professional bodies and HMRC think the tax planning arrangements standard might mean.
The point, as the concluding new standard makes explicit, is that: ‘Applying professional standards to particular client advisory situations requires members to exercise professional judgement on a number of matters.’ The essential problem with the tax planning arrangements standard is that at its heart it is seeking to prohibit members from doing certain ill-defined things, rather than seeking to establish and apply uniform, recognisable and verifiable professional standards to what they do.
The appeal to public interest concerns as a basis for the promulgation of such standards is of little assistance because there is no uniform or coherent view of what ‘public interest concerns’ really are. Each client is able to take his own view of what he thinks they are and how they may impact upon his tax planning circumstances. Ultimately, however, members are engaged to serve the interests of their clients and not the public at large.
Ministers may like to think that the professions should take on a greater lead and responsibility in relation to tax avoidance, but in fact avoidance is a function of the tax laws that ministers promote and that Parliament enacts. As the Memorandum of Dissent to the Royal Commission on the Taxation of Profits and Income noted more than 60 years ago: ‘The existence of widespread tax avoidance is evidence that the system, not the taxpayer, stands in need of radical reform.’ And the reference to the taxpayer could have included a reference to those whose job it is to advise taxpayers on their tax obligations, based on a realistic assessment of the facts and a credible view of the law. It is for ministers and parliamentarians to look to what they do, rather than to look to the professions to relieve them of responsibility for the errors and inadequacies of their tax policy and tax legislation.
For the revised professional conduct rules and related materials, see www.bit.ly/2e1qZer. An article on this topic explaining the CIOT and ICAEW view, by the Bill Dodwell and Nick Parker, was published in our sister publication, Taxation magazine, here.
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