I have on my desk an Opinion – a piece of formal tax advice – from a prominent QC at the Tax Bar. In it, he expresses a view on the law that is so far removed from legal reality that I do not believe he can genuinely hold the view he says he has. At best he is incompetent. But at worst, he is criminally fraudulent: he is obtaining his fee by deception. And this is not the first such Opinion I have seen. Such pass my desk All The Time.
The “he” in question, I shall not name. But the brief description in the above paragraph will be sufficient to enable that part of the tax profession that regularly uses tax Counsel to narrow the possibilities down to slightly under half a dozen names. These are the Boys Who Won’t Say No – the “Boys” for short – and we all know who they are.
Assume you are a seller of tax planning ideas – a “House”. You have developed a planning idea that you wish to sell to taxpayers. But your customers will typically want independent corroboration – from a member of the Bar – that your idea ‘works’, that is to say that it delivers a beneficial tax treatment. Or, to use the preferred euphemism, that it ‘mitigates’ your tax liability.
The fees that can be generated from bringing a planning idea to market are substantial: I am aware of instances where a single planning idea has generated fees of about £100 million pounds for the House. But without barrister sign-off, you have nothing to sell.
This fact creates predictable temptations for the Bar. If you are prepared to sign off a planning idea, the House will pay you handsomely. In some instances hundreds of thousands of pounds for a few day’s work. But the tax code is not made of swiss cheese. Planning ideas that actually deliver are rare. Their supply is constrained – constrained far beyond demand.
All of this is trite.
It is what happens if you allow your independence to be swayed by your desire to collect the fee that I wish to explore. And the answer is, not enough.
Assume that you are one of the Boys. You write an Opinion of the type I have sitting on my desk. You collect your large fee – and you establish yourself in the mind of the House as an accommodative sort of professional. The sort of chap they might like to come see again in the future.
What happens next?
The House will then go out and sell that idea to taxpayers. In the case of individual taxpayers, they will sell it, typically, through IFAs to whom they will pay a sales commission.That sales commission, too, can be very substantial, running in some cases into hundreds of thousands of pounds for a single client. So the IFA can be strongly incentivised to persuade their clients that the idea works and – should the taxpayer client care about such things – that it is not aggressive tax planning.
And then? The archetypal case looks like this. The taxpayer will make their tax return, HMRC will disallow the beneficial tax treatment, and the taxpayer will challenge that disallowance in the tax tribunal (causing years of uncertainty and substantial professional fees). Should that challenge fail, the taxpayer will lose whatever money he put into the idea, face an unexpected tax charge and, very often, be publicly pilloried into the bargain.
Some especially sophisticated or well advised taxpayers will see this coming. They may feel the game is worth the candle. But one should not pretend that there is no (sizeable) rump of taxpayers who have no way of knowing what lies in store. I have written in more detail about the situation of individuals participating here and here. That many feel aggrieved at their treatment – eg Katie Melua and Gary Barlow – is clear. And that some of those pilloried as tax avoiders have been mis-sold to is, to me, beyond question.
Where do the controls lie? What stops the IFAs and the Boys from banking, uninhibited, their fat fees for bad advice?
The IFA, having a direct contractual relationship with the client, can be sued for negligence or mis-selling. But the Boy? What of him?
Barristers are, of course, regulated by the Bar Standards Board. But their duties, by and large, they owe to their client (in the example above, the House) – not to third parties (in my example the taxpayers). This is true both of their regulatory duties and of their contractual ones: it’s not easy for a barrister to be sued otherwise than by the party to whom he gave his advice.
And when the barrister is sued, he benefits from a mutual insurance fund. All barristers contribute to the fund from which the first £2.5m of any claim against a barrister is paid. If claims are made against the fund, premiums rise to fund those claims. But because the fund is a mutual, those premiums rise for all – not just the person responsible for making the claim. So the practice of the Boy is subsidised by the rest of the bar. He picks up his large cheques for giving advice he cannot believe to be right – and his insurance premiums rise no more than mine.
So when I talk in the title to this Blog of Weak Transmission Mechanisms, it is this that I mean. The mechanisms that transfer tax risk from those who bear it to those that should are too weak.
Those that bear it are the individuals in my example above. As I have said, in many cases they have no way of knowing whether they are engaging in ‘good’ or ‘bad’ tax planning. And yet they bear all the risk. Those who should bear it – at least share it – are the Boys. They grow rich saying yes when no one is better placed than them to know they should say no.
But sadly tax is no exception to the general rule that risk rolls downhill and falls on the guy at the bottom.
What is to be done?
A solution that seems to me to have its attractions is to place on UK barristers (and other tax advisers) a similar obligation to that placed on tax advisers in the US by IRS Circular 230, §10.37(a)(2). Written tax advice must not be based on unreasonable factual or legal assumptions or unreasonably rely upon representations of the client or others, and it must consider all relevant facts and law. Where written advice does not meet those standards, the practitioner would face direct financial penalties. He might then have better reason to Say No.
I do not claim expertise in the operation on the ground of that Circular. And nor do I wish to advance policy making on the hoof: plainly the experience in the US of the operation of the Circular has been mixed. It is beyond the scope of this Blog to conduct an in-depth review of its operation, and what lessons the UK authorities might learn. But the principle seems to me to be sound.
(A further solution – one that I have not foreshadowed in this Blog – might be to adopt a new drafting technique for tax reliefs that sought to explain in terms intelligible to a reasonably interested non-professional what obtaining that relief involved. Such a technique would be designed to shrink the size of my ‘sizeable rump’. If you then chose to take a punt, at least you would be doing it with your eyes wide open).
Most of my colleagues at the Revenue Bar act properly and scrupulously. But it saddens me that a number – whose names are well known to us all – do not. Their behaviour makes victims of the general body of taxpayers whose tax take is reduced (I have explained here how even schemes that don’t work cause a loss of tax). It makes victims of those taxpayers who are mis-sold to. And it besmirches my profession.
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Waiting for Godot 
This is both interesting and worrying! A question springs to mind, though: Is there not an argument for some self-policing by the barristing profession? It sounds like it would be the right thing to do for the integrity and reputation of the Bar to offer a counter-opinion to such extreme incorrectness, and if you effectively have collective liability for the misdeeds of individual members, that would justify a level of collective scrutiny, especially if this is a very small number of repeat offenders.
Thanks for the suggestion.
I’m not sure how apt the comparison is, but it has often struck me as odd that the Medical Profession strikes off Drs where their exercise of their professional skills falls below a minimum standard. But the Bar does not. I have suggested on twitter that the Bar Standards Board might be invited to consider whether the conduct of the Boys brings the profession into disrepute. But we can’t police advice as it goes out, for obvious reasons.
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As well as agreeing with grb26’s point, couldn’t you fix the incentives problem here by disallowing an insurance claim where an opinion was given in a clearly negligent or sub-professional manner? That would nudge barristers into thinking more clearly about how their opinions are going to be used in the real world, just as accountants have to do already.
But I do also ponder why scheme organisers persist in recruiting QCs who give what-prove-to-be-useless opinions when they must know that, before long, a whole wave of costs will be coming back to bite them?
Barristers think very clearly about how their opinions are going to be used. They know, just like auditors, that they only owe their duty to their client (in the case of an auditor, the shareholders; in the case of the Boys, the House). And that fact protects them from the real victims (those who buy from the House).
Obviously, Houses want the best ‘name’ QC available. But if those with a good reputation won’t sign off, then some Houses will just go down the list until they find someone else who will. The House typically collects its fee whether the product works or not.
As to your insurance point, the policy is designed to protect against negligence. There’s probably a provision voiding the policy in the case of deliberate wrong-doing by the insured, but that’s very very difficult to establish.
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Your piece is getting some attention, even for those of us not at the tax bar (who probably wouldn’t understand the issues anyway!).
There is self-policing of the tax Bar as there is in all areas of the Bar: if the Opinion you have seen is truly incompetent or dishonest, you should report the “boy” to the Bar Standards Board.
Our profession has historically self-selected, because solicitors (our professional client base) are much more skilled than the public would be at sniffing out incompetence. The truly incompetent wither away. Of course, you are not saying that this QC is incompetent; it is apparent you think he lacks integrity because he has lost his professional independence for the sake of attracting this lucrative work.
The difficulty is I suppose two-fold: it is not in the nature of our profession to ‘squeal’ on each other too readily (and indeed that is true in most professions); secondly, because of the hierarchical nature of the profession, you would need big balls to report a silk. Yours must be fairly weighty to write your piece in the first place…
Even if you did report, the charge would require a weighing up of the merits of legal opinion in a difficult and highly specialist area of law. Very difficult for a disciplinary panel to be satisfied that the Opinion was written cynically. And so, I suppose, the boy would get away with it unless it was truly indefensible with fellow QCs saying so. Hmmm.
The analogy with the GMC is not a perfect one: it is hard to imagine a case where a specialist consultant would deliberately give a false diagnosis for financial benefit. The nearest analogy is where unnecessary treatment is given to rack up fees, but it is not exact. Dentists and doctors do get erased for that sometimes.
Great blog anyway – thank you.
Thanks for your thoughtful comments.
There is a degree of policing in the market. The Boys, known as they are, are little consulted by the highest quality solicitors and accountants: those professional clients know that they do not get for their lay clients a serious answer to the question at hand. But whilst this limits their practice it limits but modestly the harm that the Boys do.
I have considered my own obligations. To report the Boys would involve me breaching my duties of confidentiality to my clients (through whose instructions I see the Opinions). My assumption is that this trumps my own obligation. But I may be wrong on this. Like you I also wonder – genuinely – whether the BSB is the best tribunal to resolve these issues.
But I have heard – from Prof Neg QCs, Insurance QCs, other tax barristers, partners at leading firms, and a Govt minister – that the problem I describe is one that they recognise.
I understand that a leading professional institute is planning a high level round table, to which it proposes to invite ministers and shadows and representatives of the professional bodies to discuss the legislative solution I have proposed. And I mean to work that solution up further in advance.
I will write again as matters develop.
Themes picked up by the FT http://m.ft.com/cms/s/0/7945e486-1ef4-11e4-9d7d-00144feabdc0.html?siteedition=uk
These are probably the same Counsel who advise that an avoidance scheme does not need to be disclosed under DOTAS.
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I sense that something similar could happen to The Boys as happened to the commuter who was alleged to have dodged train fares to London worth close to £43,000. Your blog has been picked up by the FT (that is how I found it) and it is only a question of days before it gets picked up by the other broadsheets and then the ‘red tops’. As the publicity machine rolls on institutions, like the BSB, which the public is required to trust, have to move in on these targets – otherwise they are worthless (and the know it).
As you may recall the commuter, whose fare dodging was announced in April, was recently identified as Jonathan Burrows after the initial news reports led to an investigation by British Transport police being triggered. Then it was revealed that the initial news reports also led to the Financial Conduct Authority (FCA) investigating Burrows over concerns that he could be unsuitable for working in the City. At the beginning of August he was forced to tell his managers at BlackRock that the regulator was investigating him. He was suspended immediately from his job and eventually resigned. He will never work in the City again.
A suggestion based on an idea to solve a similar problem. Companies are audited but there’s a conflict of interest as the auditors are paid by the company to do the audit, and so can profit by being lenient towards their corporate client. This can have large implications, whether in the odd corporate scandal, or even some would say, the financial crisis, as the auditors failed to police the banks.
A solution I’ve heard for this is ‘financial statement insurance’. Basically, the regulations would change, such that companies would have to hire an insurance company that would provide insurance to investors, the idea being that the insurance company would then hire the auditors instead, so they would work to try to lower the insurers costs i.e. provide more accurate and detailed audits. So the incentives are better aligned. Here’s more detail:
Click to access Forensic_Accounting.pdf
I’m no expert, but perhaps a similar idea could work for tax? Individuals getting tax advice, could instead buy insurance, and the insurers would then hire the lawyer. The lawyer would provide advice that would lower the risk to the insurer, so presumably it would have to be more accurate else they wouldn’t hire the lawyer again. And individuals seeking riskier (so less legitimate) tax avoidance schemes would face higher premiums. Would this work?
Interesting, thanks. I will reflect.
I acknowledge the problem, but it seems to me that the core difficulty doesn’t lie with the Boys. Anyone marketing a tax-advantaged structure needs to reference Counsel’s opinion. No investor is actually going to read that opinion, but it has to be in place. Normally that opinion will be along the lines of “on the one hand…but on the other”. But it doesn’t matter what it says. As long as that opinion doesn’t explicitly preclude the proposed arrangement it’ll be sufficient for marketing purposes, and the relevant barrister can be named in promotional material. And in real life that’s all that matters.
I remember once remarking to a QC of my acquaintance that I was surprised to see his name given as a tax adviser to a fund-raising proposition which struck me as highly dodgy. To which he replied that he had indeed provided tax advice, but that didn’t necessarily mean that his advice had been followed.
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I’m not sure that the most readily applicable professional conduct rule in such cases is ‘bringing the profession into disrepute’. CD7 in the Bar Code of Conduct states ‘You must provide a competent standard of work and service to each client’.
Further, perhaps someone in your position could seek to reconcile your duty to your client and your regulator by seeking your client’s consent to disclosing the advice to the regulator.
In haste, re first point, one of the problems is that the “client” is not who you might expect it to be.
Re second, I had a lengthy and productive conversation with the BSB yesterday around this very point. It’s a rather complex dynamic and, for reasons that may not always be apparent, my clients will sometimes be more and sometimes less willing to consent. Either way, my primary obligation (relevantly) is to them.
What’s up every one, here every person is sharing such know-how, so it’s nice to read this website, and I
used to visit this web site daily.
Thanks!
At last. Thanks for sharing this Jolyon. It resonates with me even though I left tax practice in 2006. During my 25 year tax career I reviewed a number of tax schemes and, separately, spent two years as Chairman of the ICAEW Tax Faculty.
I never claimed to be an expert in tax law but I knew enough to perform the ‘sniff’ test. One of the reasons I left public practice was my frustration with the way that some purveyors of tax schemes operated – just as you summarise above.
The protection provided by opinions provided by The Boys meant that no one could be sued if HMRC successfully challenged the tax savings. And, as importantly, the taxpayer couldn’t be accused of tax fraud or deliberately evading tax even if the tax scheme did not work. After all, tax counsel, had confirmed the promoters interpretation of the rules was ‘reasonable’ and that no one was seeking to evade tax. Just to avoid it.
Before I finally stopped writing on tax at the end of 2011 I addressed many similar points in my Tax-Buzz blog. More recently I have focused on helping accountants to avoid(!) getting caught out by overly optimistic promoters of tax schemes. See:
http://www.bookmarklee.co.uk/2013/04/15/why-dont-all-accountants-promote-tax-schemes/
http://www.bookmarklee.co.uk/2012/06/25/ten-things-accountants-need-to-understand-about-tax-schemes/
http://www.bookmarklee.co.uk/2014/05/27/confessions-of-a-tax-avoidance-scheme-promoter/
Thank you very much for this article. The practice goes against everything that a professional person ought to be.
Above all, he/she should be objective. It is a sad state of affairs that the IRS in the US has to put this in a circular – after, all isn’t it a given, that this is how you should give your advice?
Two points that come to my mind:
1. Do we know whether this is happening only in the tax world, or are there other parts of the corporate sector involved?
When I was a litigation lawyer, I remember hearing stories of the takeover mania in the 1980s and how there were certain merchant banks who would sail close to the wind – but that they’d always be backed up with a legal opinion. The law firms they hired would be the best, and so would their Counsel’s advice. I don’t know whether this is the position now, as it is a long time since I left that world. But it might be worth comparing, to see what if anything is being done to deter this type of “behaviour”.
2. It’s striking that the advice is given via direct access to the “marketer”. Not via a reputable law firm or accountancy practice.
While direct access may be a good thing, the advantage of having another set of advisers is that they have the ability and expertise to scrutinise what Counsel has said, and ask difficult searching questions.
Of course, the latter suggestion assumes that these other advisers have the client’s best interest at heart. And of course, see my first point – it may well be the case that the City law firms involved were only too obliging to provide an opinion that the client wanted to hear, rather than what the client ought to have heard.