In general, tax advisers must comply with the following principles:
- meet the standards required by their governing professional body (e.g. the Professional Code in Relation to Taxation (PCRT));
- adhere to the requirements of the law both as:
– to the efficacy of the tax advice given to a client; and
– to ensure that it is not negligent advice.
Broadly, the regulation of tax professionals has developed across each of the following areas:
- Legislative regulation of tax schemes or planning thereby controlling the scope of what any tax professional can advise a client to consider in order to mitigate tax. Tax statutes have constantly evolved to reflects changes in government policies, to remove loopholes in the tax code and to respond to the behaviour of taxpayers. In RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC 45, Lord Hodge (at para 10) commented:
‘10. The legislative code for the taxation of income has developed over time to reflect changing governmental policies in relation to taxation, to remove loopholes in the tax regime and to respond to the behaviour of taxpayers. Such responses include the enactment of provisions to nullify the effects of otherwise successful tax avoidance schemes (or schemes which were apparently successful pending a definitive judicial determination). As a result, the legislative code is not a seamless garment but is in certain respects a patchwork of provisions. Over time, judicial decisions on the interpretation of sections of the tax legislation have assisted in clarifying the boundaries of those provisions. …’
Parliament introduced legislation in the Finance Act 2004 to require disclosure of tax schemes under the Disclosure of Tax Avoidance Scheme (DOTAS) rules which enables HMRC to identify and then target appropriate responses to unacceptable forms of tax planning. This has been further supplemented and amplified by the General Anti Avoidance Rule introduced by the Finance Act 2013 (see generally: Tax avoidance: General Anti-Abuse Rule – GOV.UK (www.gov.uk)).
- Court regulation of ‘tax schemes’ through the interpretation of tax legislation have effectively determined the limits of what a tax professional can advise a client to implement when advising on the scope of tax legislation and the interaction of tax reliefs and charges. However, the approach by the courts to the interpretation of tax statutes was to initially adopt a formulaic and literalist interpretation which over a period of time has moved to a purposive construction. In RFC 2012 Plc (in liquidation) (formerly The Rangers Football Club Plc) v Advocate General for Scotland [2017] UKSC 45, Lord Hodge (at paras 12–15) commented:
‘12. Another, more recent, judicial development in the interpretation of taxing statutes is the definitive move from a generally literalist interpretation to a more purposive approach. This can be traced to the speech which Lord Nicholls of Birkenhead delivered in the House of Lords in Barclays Mercantile Business Finance Ltd v Mawson [2005] 1 AC 684, in which he explained the true principle established in W T Ramsay Ltd v Inland Revenue Comrs [1982] AC 300 and the cases which followed it. As he explained (para 28), the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose. In the past, the courts had interpreted taxing statutes in a literalist and formalistic way when applying the legislation to a composite scheme by treating every transaction which had an individual legal identity as having its own tax consequences. Lord Nicholls described this approach as “blinkered” (para 29). Instead, he removed the interpretation of taxing statutes from its literalist enclave and incorporated it into the modern approach to statutory interpretation which the court otherwise adopts. He stated (para 32):
“The essence of the new approach was to give the statutory provision a purposive construction in order to determine the nature of the transaction to which it was intended to apply and then to decide whether the actual transaction (which might involve considering the overall effect of a number of elements intended to operate together) answered to the statutory description. … [T]he question is always whether the relevant provision of the statute, upon its true construction, applies to the facts as found. As Lord Nicholls of Birkenhead said in MacNiven v Westmoreland Investments Ltd [2003] 1 AC 311, Page 7 320, para 8: ‘The paramount question always is one of interpretation of the particular statutory provision and its application to the facts of the case’.”
13. Lord Nicholls (para 34) recognised two features which were characteristic of tax law. First, tax is generally imposed by reference to economic activities or transactions which exist, as Lord Wilberforce said (in W T Ramsay, 326) “in the real world”. In the Court of Appeal in Barclays Mercantile [2003] STC 66, para 66, Carnwath LJ made the same point: taxing statutes generally “draw their life-blood from real world transactions with real world economic effects”. Secondly, the prodigious intellectual effort in support of tax avoidance results in transactions being structured “in a form which will have the same or nearly the same economic effect as a taxable transaction but which it is hoped will fall outside the terms of the taxing statute”. He continued: “It is characteristic of these composite transactions that they will include elements which have been inserted without any business or commercial purpose but are intended to have the effect of removing the transaction from the scope of the charge”. The correct response of the courts was not to disregard elements of transactions which had no commercial value. That, he said, was going too far. Instead the court had, first, to decide, on a purposive construction, exactly what transaction would answer to the statutory description and secondly, to decide whether the transaction in question did so (para 36).
14. Lord Reed in UBS AG v Revenue and Customs Comrs [2016] 1 WLR 1005, para 62, has helpfully summarised the significance of the new approach, which W T Ramsay, as explained in Barclays Mercantile, has brought about, in these terms:
“First, it extended to tax cases the purposive approach to statutory construction which was orthodox in other areas of the law. Secondly, and equally significantly, it established that the analysis of the facts depended on that purposive construction of the statute.”
15. In summary, three aspects of statutory interpretation are important in determining this appeal. First, the tax code is not a seamless garment. As a result provisions imposing specific tax charges do not necessarily militate against the existence of a more general charge to tax which may have priority over and supersede or qualify the specific charge. I return to this point towards the end of this judgment (paras 68–72 below). Secondly, it is necessary to pay close attention to the statutory wording and not be distracted by judicial glosses which have enabled the courts properly to apply the statutory words in other factual contexts. Thirdly, the courts must now adopt a purposive approach to the interpretation of the taxing provisions and identify and analyse the relevant facts accordingly.’
- General law, such as contract and tort law: each tax professional is subject to their contractual terms of engagement with a client as to the nature, content and quality of the advice to be provided, which generally ensures that a competent level of service is provided which does not fall below professional standards. If there is a breach of these terms, the client will be compensated under the law of contract. If there is no contractual protection, then the laws of negligence will compensate the person who has suffered damage in consequence of relying on the defective advice.
- Professional standards: each tax professional referred to in this book is the subject of minimum professional standards imposed by their governing body. Failure to comply with such rules may result in financial penalties, public admonishment or even expulsion (e.g. see the powers of The Taxation Disciplinary Board (Home | The Taxation Disciplinary Board (tax-board.org.uk) over tax professionals regulated by CIOT and ATT).
Further, the tax professional must also be vigilant to ensure that their services are not being exploited by a client or third party for the purposes of tax evasion (particularly, in light of recent legislation which has been introduced by the Criminal Finances Act 2017, which creates offences relating to the facilitation of the evasion of UK tax or, in the case of businesses with a UK connection, the facilitation of evasion of non-UK tax). A business will be liable if an employee or other associated person criminally facilitates tax evasion while acting in that capacity for the business, even if the senior management of the business was not involved or aware of what was going on. Under this legislation, advisers face the possibility of substantial financial penalties, reputational damage and possibly prison.
Further key areas of concern to advisers include the scope and application of POTAS legislation and the DOTAS legislation; as well as the impact of the Money Laundering Regulations 2017, and the codes of conduct of the various professional bodies.
This article was authored by tax barrister Julian Hickey who advises on all aspects of tax appeals, judicial reviews, tax-related criminal investigations (defence), matters arising from professional negligence, and appeals before the Disciplinary Tribunal (CIOT/ATT). If you require advice or representation in a tax matter, you can instruct Julian Hickey by contacting his clerk on Tel: 020 3150 0001 or emailing julian.hickey@exchequerchambers.com
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