Mark Lee is a man for whom I have a lot of respect and time, both professionally and just because he seems to me a very decent human being. So, when he challenges one of my assumptions on this web site I need to respond.
He said:
Notwithstanding my earlier comment on this thread I must question this statement Richard:
"most people do not want to avoid tax"
On what do you base this premise? I accept that many people do not want to 'abuse the law' which you suggest is the definition of tax avoidance. Although it's not a definition I recognise.
However I think that most people DO want to keep their tax liabilities to a minimum. They ask their accountants (and their friends) "What can I do to pay less tax?" "How can I pay less tax?" "How can I avoid having to pay all this tax?" And of course the weekend papers are full of ads for guides as to how to AVOID IHT.
To me this all indicates a desire amongst the general public to AVOID paying more tax than necessary.
I disagree: but we're into semantics here, but important ones. As I said in Closing the Floodgates:
1. Tax evasion is an illegal activity undertaken to reduce a person's tax bill. It might be for example that the person:
a. Fails to declare all or part of its income;
b. Makes a claim to offset an expense against its taxable income which it did not incur or which is of a type not considered suitable for tax relief in the country in which the claim is made;
c. Makes a tax claim which looks legal but only because a relevant fact with regard to that claim has not been disclosed to the tax authorities, and if it were the tax claim would be denied.2. Tax compliance is the other end of the spectrum from tax evasion. When a person seeks to be tax compliant they do the following:
a. Seeks to comply with tax law in all the countries in which they operate;
b. Makes full disclosure of all relevant information on all their tax claims;
c. Seeks to pay the right amount of tax required by law (but no more) at the right time and in the right place.
This activity attracts remarkably little attention, but some people do practice it.3. Tax avoidance is the grey area between tax compliance and tax evasion. When tax avoiding a person seeks to ensure that one of these happens:
a. less tax is paid than might be required by a reasonable interpretation of the law of a country, or
b. tax is paid on profits declared in a country which does not appear to be that in which they were earned, or
c. tax is paid somewhat later than the profits to which it relates were earned.The difference between tax avoidance and tax compliance is that tax compliance seeks to ensure that tax is paid in accordance with a straightforward interpretation of the letter of the law whilst tax avoidance seeks to reduce tax paid by working between the letters of the law. Both can claim to be legal, but only tax compliance can justify that claim with certainty. Tax avoidance relies on the existence of doubt for its validity. The practices referred to in this report fall largely in the area of tax avoidance, and suggest ways in which companies seek to minimise their tax bills whilst working around the law of one or more countries.
Of course there are choices available, completely within the spirit of the law, that can answer the questions you pose. People need hell to find out what the law is and what it allows. That's OK. Like HMRC I do not think this avoidance: I think it compliance. Avoidance is something else altogether. I might add it often relies on non-disclosure, as does evasion.
It's my own experience as a practitioner that proved there is a massive market for tax compliance. I think practitioners promote avoidance using misinformation on what it is, what it entails and what the risks are.
I happen to think offshore practitioners are dependent upon this. But equally, so are many onshore. I dislike it either way.
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Thanks for your kind words Richard.
Uncharacteristically your answer to my challenge seems to be to redefine the phrase in question (‘avoid tax’).
Clearly if you craft a definition different to that which most people would expect then your earlier statement “most people do not want to avoid tax” is fair.
Mark
I admit I thought we’d agreed on the need for the term tax compliance a long time ago
I also admit I do not think I have tried to redefine the term tax avoidance: rather I have sought to accurately describe it
Certainly my definitions fit those used, for example, by Prof David Ulph
Best
Richard
Tax avoidance is not a grey area, it is a means of legally minimising your tax bill. In fa t you should be tax compliant when avoiding tax, otherwise it’s tax evaision.
The governement supplies many for the tax incentives themselves to help tax minimisation (avoidance). For example encouraging sole traders to incorpoarte was tax advantageous a few years ago.
The 7 years on IHT allows people to avoid IHT on death and the tax man gets his money early on the tax paid on them.
A few years ago when i prepared my brothers Tax return, I discovered that he had overpaid his taxes by GBP 5,000, due to not using reliefs and capital losses incurred that were due to him, which he knew nothing about.
If I hadn’t told him he would have overpaid the amount of tax that was due and the Taxman would never have told him he overpaid.
It is every residents right to pay the right amount of tax, the only immoral thing about it, is the governement trying to trick people in to overpaying their taxes, and then trying to lay a guilty trip on those that pay the right amount of taxes that they legally owe!
Why should anyone overpay their tax liability?
You are a tax consultant, don’t you have a conflict of interest by not giving your clients access to all the ways of legally minimising their tax bill.? In practise you will be forcing your clients to over pay their taxes due to what your own opinions of right and wrong are, which is in your best interests, not the clients.
If you were a Trustee you would now be breaching your fiduciary duties to the beneficiaries of the trust.
Creg
That is patently absurd nonsense
Claiming capital allowances is tax compliance
It’s not though when it’s structured finance
If you can’t spot the difference you don’t know tax
I never ask a person to overpay tax
Equally I never expose them to the grey ambiguities that many tax practitioners expose their clients to, often without warning them, by working in the, inevitably uncertain areas that tax laws create, and which compound in number in the international arena
Your comment assumes a certain world. It does not exist. If you don’t know that you should not be offering advice.
And, by the way, I would not breach my duty as a trustee. Far from it. As a trustee I have a duty to avoid risk. Tax compliance does that. Tax avoidance creates considerable risk and uncertainty. No trustee should do that. You’re wrong, again
Richard
Sorry Richard but you are wrong.
Tax is an expense and any accountant doing his job properly has an obligation to act in his clients’ best interests to use lawful means to mitigate the tax liability. The accountant cannot pick and choose which lines of expense he is prepared to mitigate.
You say that “tax avoidance creates considerable risk and uncertainty”. It may well create uncertainty but so what? If the cost/benefit analysis for the client is that if he does no tax avoidance planning he will pay £1 million of tax, but if he does some tax planning he would only pay say £100k of tax but would incur £20k of extra tax planning implementation fees and is happy to accept that risk then surely that’s his choice to make, rather than it being your choice to offer it to him as an option.
I don’t see how you can practice as an accountant under your philosophy unless you make it very clear to your client at the outset, and spell it out on your engagement letter, that you won’t advise the client on anything that you consider to be tax avoidance. In that scenario your client is going into the professional relationship with open eyes. Without that protection you would be the one carrying the risk.
David
You are very wrong.
Tax is not an expense. It is legally due obligation to society. As such it is wholly unlike an expense.
Second an accountant has no obligation to mitigate tax. He/she has an obligation to act in the client’s best interests.
Of course that means offering options available within the law: that is tax compliance.
But no accountant has a duty to expose their client to risk. Or to law breaking. Or to reputational harm.
But that means no accountant should undertake tax avoidance without the explicit approval of their client who knows that they are taking risk of pursuing a course of action which may prove not to be legal.
At which point the accountant has an ethical duty to society at large not to act.
So tax compliance accords with the tax professions ethical codes. Tax avoidance is, in my opinion, explicitly contrary to them.
And of course I make this clear to clients. What worries me is that the vast majority of accountants do not make clear they will take risk for their client of which that client is not aware and which they would thoroughly resent. Do you say to your clients you may expose them to risk? Do you always make that risk clear? Do you even know you are taking it? Even if you do, I suspect most accountants do not. And that is why the profession has the appalling reputation it has.
But in my case neither they or I carry risk: no one can sue me for explicitly mitigating tax within the clear letter of the law.
Richard
Does an accountant who is unwilling to advise on ‘tax avoidance’ (using Richard’s definition) expose him/herself to risk?
As I explain when speaking about How to avoid negligence claims – there is little you can do to avoid all possibility of spurious claims. But if by ‘risk’ David means the risk of a successful claim for professional negligence then I would disagree with him.
Such a claim would need to prove that the accountant had not operated in the way expected of a ‘reasonably competent’ adviser and that the client had suffered a consequential financial loss. Very few tax avoidance scheme strategies are understood by a majority of accountants in this country. As such it is hard to see how anyone who fails to promote such a scheme could be held to be less than ‘reasonably competent’.
Sorry Richard we will have to agree to disagree on this point.
Tax is unquestionably an expense and the courts continue to reinforce the taxpayer’s right to plan his affairs in such a way that the maximum amount of tax is not payable.
Of course I advise my clients of the risks of any tax planning undertaken. Of course everything that is required to be reported by law regarding the steps is duly reported. There is nothing whatsoever wrong with that. Even HMRC expect nothing more. That is totally within the law and is therefore tax compliance.
You are not acting in your clients’ best interests by refusing to advise them within the parameters of what the courts would find acceptable. You are causing them to potentially pay more tax than they need to by putting your moral beliefs ahead of your clients’ rights. But that’s your choice and i guess its your PI policy. How many of your clients reading this will now be realising that they may have a valid claim against you?
Mark
I agree
David: your comment assumes you know the mind of the court. If you did you would be a very clever man. But as a matter of fact you don’t. The fact is tax avoidance works in the grey space where no decision has been made. As such I do work within the paramaters of what the court would find acceptable by seeking to work unambiguously within the spirit and intent of the law. You work in an areas where you cannot know what the courts will find acceptable. Which is something else entirely, and creates risk I’d suggest well over 90% of tax payers do not want, as my experience of assisting those under investigation has always proven to be the case.
As for the clients who want to make a claim, please contact me. In 25 years of having a PI policy covering thousands of clients I’ve never had a hint of a claim. There could always be a first time. I’m not expecting it for this reason. I’d also confidently expect, as Mark says, that they’d lose.
Richard
Richard
Tax practitioners interpret statutory law and case law, present their findings, make recommendations and point out the risks to the client that HMRC and the courts will disagree. The client can then make up his own mind after considering those risks. Your policy denies your client that opportunity. My approach operates totally within the law and provides the client with a lawful opportunity to lawfully mitigate his tax liability, with the client knowing his downside risk. Which one of us is acting in our clients’ best interests and which one is allowing our personal moral judgement to become more important than acting on the clients’ best interests ?
How would you properly advise a non-Dom client when you so evidently abhor the non-Dom regime?
Have you forgotten the decision in the Moore Stephens case ?
David
I note the classic position you adopt: pass the risk to the client. I long ago realised that a client came to me to ask my opinion, not for me to tell them to make up their mind.
I made my position to clients very clear: I could not advise that they take a risk that would inevitably involve considerable cost and a great deal of stress when what was almost invariably a better option was available, such as having a life or concentrating on making money (so much more satisfying, and so much harder for most accountants to understand than swindling).
The client unambiguously knew where they stood, and they were under no obligation at all to use my services. Indeed, in the case of some non-doms I made quite clear I would not create off-shore structures for them, but that this option was not closed to them and they were at liberty to seek advice from others, to whom I would on their instruction supply information. I never prevented a client doing something which appeared legal but of which I did not approve. But I would not participate in it.
The obvious analogy is the doctor who will advise that abortion services are available but will do no more than refer to a doctor who will supply them.
Where is the problem with that?
Richard
Richard
What a bizarre response! The UK government has a clear policy of positively permitting non-doms to shelter their foreign income and gains from UK tax yet you consider that to be a risk to the client. It isn’t.
You say that I would be passing the risk to my client by adopting my approach. That’s correct. I am not recklessly committing him to what might be a long and expensive legal battle with HMRC. I am telling him his chances of success and the risks of failure. He can then decide and he can make that decision with open eyes. That is exactly how professional advisors should responsibly advise.
Any advisor of any type can only advise his client. He can force him to accept that advice. The decision as to whether accept professional advice or not is always the perogative of the client,not of the advisor.
I repeat my statement that you are not acting in your clients’ best interests and I note that you did not comment on the Moore Stephens case. Your approach to dealing with non-doms has many parallels with that case.
The word “can” should read “cannot” in the second sentence of my penultimate paragraph in posting 12 above.
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what is the possible research questions on the tax evasion and avoidance.
Joyce
Please elaborate
Richard