regulation

Can a posse of professional bodies clean up tax dodge city?

17th April 2023 by Dr Pete Sproat

Following an era of austerity and a series of tax scandals, there has been a sea change in the public attitude towards tax evasion and those who create elaborate tax avoidance schemes that go against the spirit of the law.

One aspect of this change is the increased frequency of demands that ‘something must be done’. These include suggestions tax advisers should be subjected to additional rules and better enforcement by HMRC, while ideas such as mandatory membership of a professional body or regulation by an external body have been proposed in recent articles in AccountancyWeb by Ray McCann – former President of the Chartered Institute of Taxation – and Mark Lee – founder of the Tax Advice Network – respectively. TaxWatch’s Dr. Pete Sproat contributed to the journal’s debate by considering the broad requirements of an effective system of mandatory self-regulation by professional bodies in an article entitled: How can we regulate the tax profession better? The main ideas of his article on AccountancyWeb are reproduced here:

Held to account

The public’s desire to hold to account those who commit or facilitate tax evasion increases after each tax scandal. Accountability is also a major reason people choose members of professional bodies to provide tax advice. Customers believe professionals are unlikely to provide dubious advice because professional bodies insist on standards, and deal with those who breach them. Unfortunately, in practice promoters of tax avoidance schemes are “almost never members of the professional accountancy bodies” according to HMRC, while we at TaxWatch have found professional bodies to appear slow or reluctant to undertake disciplinary procedures against those who are suspected of breaching their rules.

If the solution is to be ‘self-regulation’ by mandated membership of a professional body, as implied recently in AccountancyWeb by Ray McCann, it would be better for the bodies to collectively propose a comprehensive plan for a system of mandatory self-regulation, than wait for a government minister to propose an externally regulated regime and then criticise it. It is suggested that to be effective, a system based upon professional bodies would consider the following aspects.

Membership coverage

Given HMRC suggests more than one in three tax advisors do not belong to a professional body, and almost all promoters of tax avoidance schemes belong to this group, any system of self-regulation that did not require compulsory membership of one of a number of specified professional bodies would be fatally flawed. Making membership compulsory would require government legislation.

Control authorisation

Those authorised to provide tax advice would need to be capable of following both tax laws and professional rules of conduct. Presently, professional bodies tend to assure this by use of entry qualifications and /or a period of experience working in the area. They also insist members hold professional indemnity insurance. Therefore, obtaining agreement on a credible set of minimum standards in these two areas should not be a problem in practice.

Professional bodies might also wish to propose directors of companies providing tax advice are authorised so that it is easier to make firms accountable for the actions of their employees. They might also like to consider whether tax advisors should complete continuing professional development.

Conduct rules and sanctions

Professional bodies would have to agree a minimum set of conduct rules and sanctions, if not ethics, to avoid regulatory arbitrage. This too seems a realistic possibility given the existence of the Professional Conduct in Relation to Taxation.

Monitoring the rules

A major advantage to professional bodies of mandatory self-regulation would be their ability to decide on their approach to monitoring the rules. It has been suggested that the regulatory and oversight arrangements provided by the ICAEW “already meets, and in some areas exceeds, the statutory regulatory requirement found elsewhere in the world”. Evidencing such claims in relation to countries with an external regulator such as Australia, could help persuade outsiders that this form of regulation would be the best option.

Thoroughness of investigations

Similarly, a joint approach to issues such as a statute of limitations, as well as the thoroughness and speed of investigations would be necessary. A proposal that included enhanced monitoring after an initial assessment of any complaint could help persuade sceptics that charlatans would have difficulty continuing to make money while a PB undertook a thorough investigation.

Adjudication panel

The sharing of an independent adjudication panel for judging breaches of the shared conduct rules would help avoid the criticism that the application of sanctions differed in practice. The fact the Chartered Institute of Taxation and the Association of Tax Technicians share the Tax Disciplinary Board shows this is not beyond the realm of possibilities.

Cost to advisers

When resisting calls for external regulation, advocates of self-regulation often cite cost – albeit without any real evidence. Indeed, it is impossible to evidence the claim self-regulation would be cheaper without a detail proposal as to what it, and an externally regulated regime, would look like. Presently, advocates of the latter are likely to suggest the annual cost to each tax advisors of their system would be in the region of $731 (£407.61) before tax, for this is the cost to each tax advisor of regulation by the Tax Practitioners Board in Australia. Professional bodies are advised to keep this in mind when designing a system that looks like it would work as well, or better, in practice.

Conclusion

The system as it currently stands is not working. Hopefully, this and the piece in AccountancyWeb, encourages the relevant professional bodies to take a more pro-active approach to problems in the tax advice market, and a more co-operative approach to reducing them. Alternatively, they could do nothing and hope the problems go away. Without evolution, the professional bodies may see an external regulator imposed on the profession.

Image by Limoredin from Pixabay.

R&D relief – still not working?

6th April 2023 by Alex Dunnagan

This piece on research and development tax relief was originally published in the R&D Tax Credit Insider newsletter on LinkedIn.

What does the money achieve?

R&D tax relief is an important government policy intended to incentivise businesses to incur expenditure on R&D that is ultimately expected to bring economic benefits. Efficient operation of the system behind it is vital to achieve this. One issue around tax reliefs more generally is that, once introduced, their costs and benefits generally get much less scrutiny than other direct government spending, even if they end up costing significantly more than forecast. It is critical that what is essentially government spending is producing beneficial results for the taxpayer alongside the claimant businesses.

There has long been debate about whether and how much R&D tax relief benefits the economy. Most advisers have stories of businesses that would not have been able to fund their innovations without the reliefs, and the generally held view is that businesses bring forward their R&D investment due to a greater appetite for risk resulting from the existence of the support. However, it also seems clear that at least a proportion of claims are made in relation to expenditure that was incurred without the businesses being aware of the relief so they could not have been incentivised to carry out that R&D.

The complexity of the schemes means many businesses and their ordinary advisers do not feel able to make claims themselves. This has resulted in the large market for R&D claims specialists in the same way that the increasing complexity of tax generally has increased the tax advice market. Of concern for R&D relief is the clear growth of firms of advisers using inappropriate marketing and promotion to persuade businesses to make unreasonable claims, taking a percentage cut in the process. It seems to be well accepted (and confirmed by HMRC estimates of fraud and error) that a proportion of the relief has been going to businesses who do not qualify, along with the fees to their advisers, in some cases a significant percentage of the claim. Recent years have seen little in the way of scrutiny from HMRC which has presumably encouraged more of this approach.

A further cut of the pot also goes in interest and fees to finance companies offering upfront loans against future receipt of claim repayments. It is understandable that businesses wish to improve their cashflow when waiting for repayments. However, the reliefs were not intended to support businesses changing their croissant recipe along with their associated advisers and finance companies.

These concerns have led to the legislative changes coming in this year, including the reduction in benefits in the SME scheme, which will ultimately impact genuine R&D claimants and their advisers alongside the less reputable end of the market.

‘Problem’ advisers

This piece will not rehearse the extreme examples of R&D projects claimed to be eligible for relief by a variety of less reputable advisers but it is clear that these are the source of significant numbers of problem claims.

The changes to legislation requiring pre-notification of claims six months after the end of the accounting period will go some way to preventing speculative backdated claims that appear to be part of the ‘overmarketing’ problem.

The requirement to identify advisers compiling the claims alongside a responsible officer within the claimant business is also expected to improve compliance. However, the first pre-notifications won’t happen until around September 2024 and it will be getting on for two years before HMRC are receiving information in a digital format to enable proper targeting of risk assessment. This is plenty of time for many more spurious claims, which could lead to further losses in the region of £1bn based on most recent estimates of fraud and error, which would further discredit the system.

Many people within the industry have been advocating for compulsory professional regulation for R&D advisers (and more widely in the tax adviser industry)¹. Research has shown that 80% of advisers that are not members of professional bodies have no professional qualification², which is surely unusual in the financial services industry and gives rise to significant risks to both clients and HMRC. However, consultation last year on improving the tax advice market resulted in no changes and intentions for a further consultation that has not yet appeared. In the meantime, problem advisers, who are generally unregulated, are continuing to abuse the system and potentially cause financial damage to those unwittingly accepting their advice if boundary-pushing claims are eventually refused.

The issue of regulating tax advice is obviously a complex one and there is no straightforward answer but the fact that HMRC are still failing to deal properly with problem agents results in poor outcomes for everyone involved in R&D reliefs. It is therefore critical that targeted compliance efforts against problem advisers are stepped up prior to the new legislation kicking in.

HMRC approach and resources

TaxWatch recently submitted evidence to the Public Accounts Committee enquiry into managing tax compliance following the pandemic and many of the issues raised are relevant to how R&D policy is formed, how it works in practice and how HMRC handle compliance³.

The report highlights issues with increasing complexity of tax legislation alongside the closure of the Office for Tax Simplification, reductions in the numbers of tax professional staff in HMRC and inexperienced staff working in compliance, lack of long term funding and resourcing for compliance, and lack of evaluation of new legislation and different compliance approaches.

Recommendations included:

urgently explaining the new mandate to be given to HMRC and the Treasury to simplify the tax code
committing greater funding to compliance given its positive return on investment
putting in place long term resource planning to ensure a consistent and robust compliance response
putting in place a programme of evaluation in relation to all new legislation and compliance projects
considering what other action can be taken against problem advisers.

As Malcolm Henderson said in a previous piece, the majority of staff at HMRC want to provide good customer service, and the experience held within the previous specialist R&D units encouraged claims where they were due as well as ensuring compliance with the rules⁴. Obviously that level of support has been overwhelmed by the huge increase in the numbers of claims, and the current rush to tackle compliance concerns has resulted in the reported scattergun approach to identifying risks and inconsistent treatment between different officers.

Of particular concern is recent evidence from the Institute for Government that between March 2016 and March 2022 there has been a reduction of 8,160 Full Time Equivalent (FTE) staff working within the tax profession in the civil service.⁵ A reduction of that level of highly qualified staff within HMRC obviously impacts on their performance across all sectors and will almost certainly affect the department’s approach to R&D compliance.

There is clearly a concern in the R&D industry that HMRC’s approach to compliance is not working. It has been suggested that compliance staff are not properly trained for the role and do not have enough experienced support to advise on the R&D definition. There appears to be a general feeling that they are often challenging the wrong cases, costing businesses time and money, creating a disincentive to make future claims

The definition of R&D belonged to the Department for Business, Energy, and Industrial Strategy (BEIS) (possibly now Science, Innovation and Technology?). That definition is a specific difficulty as it is vital for establishing eligibility but is not a tax concept. The original R&D teams had sector specialist who were available to assist with applying the definition. It is not clear whether those roles still exist, except for software cases where staff from the Chief Digital and Information Office (CDIO) are providing guidance. However, this raises the question whether there are non-tax professionals within government who would be better able to test claims against the eligibility definition, alongside the tax compliance staff dealing with other aspects.

It seems clear that without a significant improvement in HMRC’s compliance performance on R&D cases, the schemes are likely to suffer further damage impacting on the overall benefits to the economy.

1Raising standards in the tax advice market: Summary of responses and next steps, HMRC, November 2020, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/934614/Raising_standards_in_the_tax_advice_market_-_summary_of_responses_and_next_steps.pdf

2Understanding the characteristics of unaffiliated tax agents, HMRC, November 2021, https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1037031/Understanding_the_characteristics_of_unaffiliated_tax_agents.pdf

3Written evidence submitted by TaxWatch, Public Accounts Committee, January 2023, https://committees.parliament.uk/writtenevidence/115783/pdf/

4R & D tax credits: Customer service examined, R & D tax credit insider, 2 February 2023, https://www.linkedin.com/pulse/rd-tax-credits-hmrc-customer-service-examined-rufus-meakin?trk=news-guest_share-article

5Civil Service Staff Numbers, Institute for Government, 15 December 2017, https://www.instituteforgovernment.org.uk/explainers/civil-service-staff-numbers

TaxWatch submits regulatory complaints against arms dealer’s adviser.

16th November 2022 by Alex Dunnagan

TaxWatch has lodged complaints to both the Chartered Institute of Taxation and Institute of Chartered Accountants of England and Wales about the conduct of Zaheer Dudhia, an accountant and tax adviser. This complaint centres around our assertion that Mr. Dudhia failed to act with integrity in relation to his dealings with a Hong Kong auditor when acting for an arms dealer whose overseas company he helped set up.

Dudhia is a Chartered Tax Adviser for Z. Dudhia & Company Limited, and Chartered Accountant for Dudhia Lewin Myers Associates Limited, Amdaza Ltd, London Bookkeeping Services Ltd, and Mount Road Property Ltd.

This is the third in a series of complaints we have lodged with professional bodies.

Arms Dealer

Mr. Ranger, an infamous British arms dealer who had been operating since the 1980’s¹, ran Imperial Defence Services Ltd (IDS) and in early 2010 began his attempt to source surface-to-air missiles from North Korea, and to broker deals to supply the missiles and Beretta pistols from the US manufacturer to Azerbaijan. At the time there was an arms embargo prohibiting the export of military goods to Azerbaijan and the prohibitions applied to exports, trafficking and brokering activities conducted by UK persons based either in the UK or overseas.

To make these deals and to hide his involvement from the UK authorities, including HMRC, Mr. Ranger had set up a company in Hong Kong as the vehicle for his illicit trades. Unfortunately for him, Mr. Ranger was charged and subsequently convicted of two counts of being knowingly concerned in acts calculated to promote the supply or delivery of goods subject to trade controls with intent to evade the prohibition contrary to Section 34(5) of the Export Control Order 2008 following an investigation by HM Revenue & Customs.²

Evidence from the case shows that in 2009-2010 Mr. Zaheer Dudhia assisted Mr. Ranger in setting up his Hong Kong-based company Hong Kong Commercial Ltd – albeit in the name of Ranger’s Vietnamese girlfriend. On paper, she had no familial or business connections to Ranger, who was not listed as a director. Documents from the trial also reveal Mr. Dudhia designated himself a Chartered Tax Adviser and Chartered Accountant in correspondence with Mr. Ranger, was involved in setting up the Hong Kong company’s bank account, and acted as its accountant during this period.

It was the prosecution’s case that although his girlfriend was the listed director, it was Mr. Ranger who directed and controlled the company; Mr. Ranger set it up, financed it, and operated the company bank account, and conducted the company’s business. Similarly, Mr. Dudhia himself indicated the company in Hong Kong would be Mr. Ranger’s in correspondence with a prospective bank.

Hong Kong Audit

In August 2010, Mr. Dudhia was asked whether there was any relationship between Mr. Ranger’s UK-based arms business Imperial Defence Services Limited (IDS) and Hong Kong Commercial Ltd by the Hong Kong-based auditor Cheng & Cheng Limited. Despite having sent emails to Mr. Ranger at IDS, Mr. Dudhia responded “no there is no relationship”.

TaxWatch suggests that this failing to inform the Hong Kong auditor of the true relationship between IDS and Mr. Ranger’s Hong Kong Company, constituted a breach of the rules of the two professional bodies to which Mr. Dudhia belonged, and is still a member of. In terms of the Chartered Institute of Taxation’s (CIOT), Professional Rules and Practice Guidelines in place from 2006-11, Paragraph 2.2.1 stated:

“A member must be honest in all his professional work. In particular, a member must not knowingly or recklessly supply information or make any statement which is false or misleading, nor knowingly fail to provide relevant information.”

We also assert Mr. Dudhia’s answer to the auditor may have breached General Principle 2.4 which declared:

“…a CIOT advocate must not engage in conduct which is dishonest or discreditable or which might bring into disrepute the tax profession of which he is a member. He must not compromise his professional standards in order to please his client or a third party.”

Although TaxWatch has no evidence Mr. Dudhia knew the Hong Kong business he helped create would be used by Mr. Ranger to try to breach export control legislation, given the company enabled a crime, we request the CIOT investigate the possibility that Mr. Dudhia may have breached CIOT’s guideline 2.2.3 which stipulated:

“A member should not act if he considers that the fulfilment of his client’s instructions involves a risk of assisting in a criminal activity”.

As for the rules of the Institute of Chartered Accountants in England and Wales, it is suggested the provision of incorrect information to the Hong Kong auditor of the true relationship between IDS and Mr. Ranger’s Hong Kong Company, may have constituted a breach of two of the Fundamental Principles of its Code of Ethics (1 September 2006-31 December 2010), namely those on Integrity and Professional Behaviour. In detail, it appears to be contrary to Section 110.1 which stated:

“The principle of integrity imposes an obligation on all professional accountants to be straightforward and honest in professional and business relationships. Integrity also implies fair dealing and truthfulness.

It follows that a professional accountant’s* advice and work must be uncorrupted by self-interest and not be influenced by the interests of other parties.

110.2 A professional accountant should not be associated with reports, returns, communications or other information where they believe that the information:

(a) Contains a materially false or misleading statement;…”

TaxWatch posits this action may also be a breach of the Section 150.1 which declared:

“The principle of professional behaviour imposes an obligation on professional accountants to comply with relevant laws and regulations and avoid any action that may bring discredit to the profession. This includes actions which a reasonable and informed third party, having knowledge of all relevant information, would conclude negatively affects the good reputation of the profession.”

Photo by Clint Patterson on Unsplash

1His name has been featured in the media on several occasions, most notably for selling the rifle used in the Hungerford Massacre in 1987. See https://www.theguardian.com/politics/2003/apr/27/ukguns.armstrade Ranger imported the weapon before selling it to Westbury Guns, who then sold the rifle to the individual who committed the murders. https://www.vice.com/en/article/vdq4d3/mick-ranger-gun-sale-profile

2HM Revenue & Customs. ‘Arms to Azerbaijan Dealer Jailed’. 20 July 2012. https://webarchive.nationalarchives.gov.uk/ukgwa/20121016173420/http://hmrc.presscentre.com/Press-Releases/Arms-to-Azerbaijan-Dealer-Jailed-67d78.aspx.