Badging Tax Risk (2)

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.

  1. 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’.
  2. 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?
  3. 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.
  4. 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?
  5. 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.
  6. 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.

16 thoughts on “Badging Tax Risk (2)

  1. Jolyon

    Full marks for persisting.

    Two comments. If the title is to be Badging Tax Risk rather than Badging Tax Avoidance Scheme Risk then I think you have to cover adviser. You may not have operated in the end of the market where it is common to see the risk that bad advisers create but I and others who will read this have, and it is a bigger risk for most than anything to do with packages tax avoidance. So I suggest renaming or inclusion is needed.

    And why include morality? Because this is an ethical profession and that requires the statement of an opinion to the client on what they are proposing to do. Otherwise there is mo ‘profess’ion, just a technical service.

    David Quentin and I are working on this issue at present. I might share with you offline.


  2. I’m reading “full marks for persisting” with my “happy” hat on.

  3. Keep smiling

    It was genuine

    You need to be persistent to get any message across

  4. Looking at this from the other side, is this something that HMRC could adopt as an internal risk analysis tool and adopt different attitudes towards different taxpayers as a result? Those who are assessed as being ‘high risk’ could then be treated differently (not just in terms of amount of time/skill of inspectors, but in terms of taking a hard line on everything – so if assessed as high risk HMRC could take the lead in being aggressive in requiring absolute compliance with everything, such as companies house filings, etc). What brought this to my mind was reading the Guardian’s stories last night on some of the Luxembourg structures. I could spot a few places where, if HMRC was being very aggressive, it could potentially have attacked the structures.
    But, AIUI, for HMRC to adopt different attitudes towards different tax payers (and I think we all agree we don’t want HMRC to be very aggressive to everybody) it needs a rational basis to do so. This risk analysis could act as that rational basis.

  5. You might want to read Iain’s comment on Badging Tax Risk (i.e. Tuesday’s post). I think you’ll find that HMRC does already do this…

  6. Jolyon

    I am somewhat surprised, not unpleasantly so, to see Richard Murphy echoing my comment on ‘tax risk’ really in this context being ‘tax avoidance’. I do think a stronger definition for tax risk would serve you well. That said, Point 3 of your commentary is based upon your experience and so you must in all conscience follow that.

    I think Point 5 of your commentary is very well put. I read on a blog about a year ago “Morality is subjective or it is not morality”. I don’t know if I agree with that completely but certainly it is formed by the individual and no two individuals will share morality. We really are heading up a cul-de-sac when we try to impose our moral standards on somebody else. Helpfully, the professions – and CIOT members will no doubt confirm this – will have a fairly clear code of ethics, which should be enough for us. They might no always uphold these codes as they should but they are there and there doesn’t appear to be a gap in the market for you, me or anybody.

  7. Yep – I agree re tax risk… Even if one assumes that I know what I mean about when I talk about tax risk (and that’s not an entirely safe assumption) then it certainly doesn’t follow that everyone else does. Thanks. Will cogitate on your other comments. Thanks, again, for commenting.

  8. I was aware that HMRC do risk assessments, but does that extend to how they treat taxpayers as well as how they deal with them internally?

  9. Ah. My apologies. I think that’s something they’re starting to look at – more on this in my Hardman lecture next week.

  10. As Ironman says, morality is a personal issue. Anyone who claims to know what is and isn’t ‘moral’ (as opposed to saying what their own morals are) is adopting what I consider to be an arrogant stance, essentially saying their morals are ‘better’ than other peoples.

    I think that laws generally arise out of a collective morality. If enough people feel that something is sufficiently morally unacceptable then laws will be passed to prohibit it.

    In some countries adultery is illegal but in the UK it is not and we seperate the morality and legality of adultery and won’t intefere with an individual’s choice on that issue.

    It seems that ‘morality’ and ‘the spirit of the law’ are supposed to influence the taxpayer and his/her advisor but I’ve yet to see a situation where either have stopped HMRC using the letter of the law when it suits their purpose.

    Point 5 (at the top of your post, not badge 5) is quite right. Anyone seeking to bring morality into this debate is acting immorally (although obviously only in my own opinion).

  11. Hi Jolyon
    I like your approach here albeit that it seems to be a theoretical exercise. By which I mean that I doubt many taxpayers who are tempted by avoidance schemes will take any notice.

    Over the last few years I have blogged a number of times on related issues to help those accountants who might otherwise be stuck in the middle:

    – Confessions of a tax avoidance scheme promoter
    – Failed tax avoidance schemes and dissatisfied clients
    – Accountants discouraged by ICAEW from advising on aggressive tax schemes
    – Ten things accountants need to understand about tax schemes
    – Why weren’t all accountants promoting those tax schemes?

    More recently I added a blog post that references your recent expose re Opinions:
    – More doubt spread re ‘approved tax schemes’

    As will be evident from these blog posts (all on my site or traceable via google) I am no fan of fancy schemes and it’s some years since I was in practice myself giving tax advice.

    There are, I believe, three main types of taxpayers who get involved in tax schemes:

    1 – Those who ask their accountants to find some way to reduce their tax liability;
    2 – Those who are targetted by scheme promoters or their proxies (eg: financial advisers)
    3 – Those who receive pro-active advice from their accountants to reduce tax liabilities through the use of tax schemes.

    In the main I suspect that fewer and fewer accountants are offering such advice any more – and my blog posts have long been intended to validate this as a reasonable stance to take. My views run contrary to the scaremongering that has come from some other quarters; they argued that accountants were at risk of professional negligence claims if they failed to advise on schemes.

    I am unaware of how effective has been HMRC’s longstanding list of ‘tax planning to be wary of’ on what is now the avoidance scheme pages of their website – previously on the spotlight page.

    The key challenge is how does the public, tempted by or advised to adopt a tax scheme get to know about the ‘badges’ and how much impact will they have if their enthusiasm has already taken hold.

    I wonder if it’s appropriate to consider an analogy? How many skiers, deep sea divers or other ‘dangerous’ sports enthusiasts allow themselves to be discouraged by reference to the risks of serious injury?

  12. I guess we will all have our own views of how many taxpayers are mis-sold to. My own view is really quite a large range number. HMRC’s recent focus on the question rather suggests that is their perception too.

    I hope to have good news on the ‘publicising’ question shortly. But, for my own part, this does seem to me to be the major challenge. I have a couple of ideas of my own which I will push on with in a couple of weeks (after immediate work crisis) but all suggestions gratefully received.

  13. I’m not able to make the lecture – will it be available online anywhere?

  14. It will be, yes. I have asked the ICAEW for permission to publish it here. But if you follow me on twitter, I will tweet out a link to wherever it is published. Thank you for asking.

  15. Pingback: Waiting for Godot | Tax Avoidance – Game Over? The Hardman Lecture 2014

  16. For:

    “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?”

    I’d say yes, if consensually arrived at and collectively developed.

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