Thanks for the tremendous response to Tuesday’s post.
Rather than continuing to debate in the comments section, I thought I would address (here) some of the recurrent themes that seem to me to have emerged.
- The purpose of these badges is to help taxpayers decide for themselves whether to transact. If they are in the hands of ‘good’ advisers, they will not need to make this decision on their own. A good adviser should assess her client’s appetite for tax risk and act accordingly. But it seems to me that even a client of a good adviser should exercise some independent judgment; how else can a client really know whether an adviser (and advice) is ‘good’.
- No single one of these badges will be decisive. It’s easy to spot instances where the badge will tell a taxpayer nothing at all about a particular transaction; it may even send a misleading signal. But the question we should have in our mind in drafting these badges is, will they likely send the right signal in the majority of the cases? And is there anything we can say in the explanatory sentences following the badge that will help a client with the question whether the badge is likely to be relevant?
- What is true of transactions is also true of taxpayers. Some taxpayers will have difficulty with these badges – but the fact that we can’t help everyone should not be a reason to help no-one. Baby? Meet Bathwater. On the other hand, if we thought that these badges were so obscure as to be of assistance only to a tiny minority, the exercise will have failed. Clearly it is ambitious to attempt (as I do) to cover everyone from BigXCo to IndividualY with the same badges – but my experience is that everyone (even the most sophisticated) – can and do have difficulty with these assessments.
- My own view is that there’s not an awful lot to be gained by trying to assess your adviser. Plausibility, in my experience, is very often inversely correlated with quality. Those who make the best salesmen are very often those most adept at telling taxpayers what they want to hear. I can’t judge for other professions – it’s not my expectation that others should be able to judge for mine. And if we recommend that taxpayers take confidence from membership of a particular profession we might be rendering them more (rather than less) susceptible of mis-selling (as both of the long time readers of this blog will know). I have, however, introduced a new badge (temporarily numbered 5A) which touches both on this point – and a further valuable point made in the comments section. What do you think?
- These badges imply no judgment as to whether taxpayers ‘should’ be engaging in tax planning. Personally, I don’t think that’s a judgment for us: who (rashly) appointed tax advisers guardians of morality? Rather I think it’s a bit like how often taxpayers choose to wash behind their ears: a matter for them and their conscience. But there must be value in taxpayers being able to gain some sense of what tax risk they are taking on.
- Building from 5, if these badges operate properly, they will often operate to give taxpayers the confidence to access reliefs. Some taxpayers are ‘scared off’ – by a hostile and not always well informed environment – from claiming tax reliefs. But reliefs serve an important economic function and we should work to protect against that functionality being blunted.
All of this having been said, I have also updated the badges – and included some draft introductory text.
Please do continue to comment and suggest. I can promise that I have read carefully and considered every single comment on Tuesday’s post. I have tried to explain my thinking in the comments section above. But if you still think I’m not getting it, please, please have another crack.
I’m particularly interested in where we go with these badges. What do you think? Would you be prepared to post them on your website for clients? Would you suggest to your professional body that it publishes them, or a version of them? Should we give them to our own clients to consider? Please do let me know.
Badges of tax risk
Before transacting you should discuss with your adviser your appetite for taking on tax risk. Transactions that deliver a good tax result if they ‘work’ typically also carry significant costs if they don’t work: financial and reputational. Make sure you understand those risks – and that your adviser understands your appetite for them too. It’s sensible to ensure you have a written record of your discussion with your adviser that records what you have said about your appetite for tax risk.
The purpose of these criteria – or badges – is to help you form a view about the tax risks attached to your transaction. They are not designed to tell you whether the transaction ‘works’ – although clearly the riskier the transaction the less likely it is to work. And they are not designed to tell you whether you should transact – different taxpayers can quite properly have different appetites for risk.
These badges are designed for you – and not for your adviser – to apply. You should discuss them with your adviser – but you should also try and form your own view.
No single one of these criteria will be decisive – you should weigh them all together and form the best view you can.
External criteria. There are a number of externally verifiable signals of tax risk. You should ask the following questions of the person putting the proposal to you (your “Adviser”).
1. Is there a DOTAS number that I will have to put on my tax return? DOTAS stands for Disclosure of Tax Avoidance Schemes and if there is a number that is a strong indicator of high tax risk.
2. Is there a promoter reference number for your transaction? Transactions with promoter reference numbers will have been devised by those identified by HMRC as more likely to be engaged in high risk behaviour.
3. Is there a page on HMRC’s website that deals with this transaction? HMRC publishes on its website very detailed Manuals for its Inspectors which set out the tax treatment of most transactions.If the Adviser cannot direct you to where the transaction is addressed in the Manuals it may indicate the transaction is higher tax risk.
4. What fee are you being asked to pay? If you are asked to pay a fee calculated by reference to tax saved, that can be an indicator of high tax risk. If your fee is calculated by reference to your adviser’s reasonable hourly rate, that can indicate a lower tax risk. If your adviser is happy to work on either basis, again, that can indicate a lower tax risk.
5. Are you asked to keep the details of the transaction confidential, or sign a Non-Disclosure Agreement? The confidentiality in your tax affairs is generally yours to keep – or waive – and not your advisor’s. If your advisor asks you to keep details of the transaction confidential that may well indicate that the transaction is being sold to others and is a strong indicator of high tax risk.
5A. If you have an existing tax adviser, is he or she putting the transaction together for you – or is your existing tax adviser working with someone new? If it’s the latter, and he or she is going to be paid a commission for your involvement, this creates a potential conflict of interest for your adviser. You should discuss with your adviser whether he or she would be prepared to rebate the commission to you and be paid on his or her normal charging basis. If your adviser is not prepared to do this, this may signal high tax risk.
The transaction itself. Why are you transacting – and why are you transacting in this way?
6. Does your transaction advance a non-tax (i.e. either a commercial or a personal) objective? If your only purpose in transacting is to achieve a tax benefit, this is a strong indicator of high tax risk.
7. Is the attractiveness of the transaction a consequence of the tax benefits it delivers? If you would transact without the tax benefits, that is a strong indicator of low tax risk. If you are transacting in part for the tax benefits you may wish to pay particular attention to badges 3 and 11.
8. If your transaction has a non-tax objective, does the manner in which you are carrying out that transaction seem like a natural or obvious way to achieve that objective? Most transactions structured in a natural or obvious way will attract the tax treatment Parliament intends. A transaction which seems overly complicated to achieve a particular non-tax objective, or a transaction which contains steps which do not serve an obvious purpose, indicates higher tax risk.
9. Does the shape of the transaction give you a better tax result than another economically equivalent transaction? What are the tax consequences of achieving your objective through a different route? A transaction that involves you paying less than the maximum amount of tax has some tax risk but a transaction that is tax maximising has none.
10. Does the shape of the transaction advance your pre-tax objectives? If both the transaction and its shape are dictated by your non-tax objectives that is a strong signal of low tax risk.
The tax effects of transacting. In tax, as with other things, there is rarely such a thing as a free lunch. The difference between ‘good’ and ‘risky’ tax planning is very often whether Parliament intended the tax result your transaction delivers. So, you should ask yourself:
11. Is it likely that Parliament intended this tax result? It is useful to ask this question alongside 3. above: if Parliament did intend it, it is very likely HMRC’s website will say so.
12. Are you being taxed on the economic or ‘real’ transaction that you entered into – or do the tax consequences attach to some other transaction? If you are being taxed on a transaction that differs from the ‘real’ transaction that is a strong signal of high tax risk.