Draft legislation issued by HM Revenue & Customs (HMRC) regarding tax agents and deliberate wrongdoing has given a number of accountancy and tax experts cause for concern.

The experts claim the draft law, part of HMRC’s ongoing consultation titled “Working with Tax Agents: The next stage,” is too wide-ranging. One key concern is the definition of a tax agent under Schedule 1 of the draft law, which states:

“A person may be a tax agent even if: (a) the assistance is given free of charge, (b) the assistance is given otherwise than in the course of business, (c) the assistance is given indirectly to the client or at the request of someone other than the client, or (d) the assistance is not given specifically to assist with the client’s tax affairs, but the person giving the assistance knows it will be used, or is likely to be used, for that purpose.”

The fear is that anyone – whether or not in the course of business – can fall foul of the new rules should he or she give advice that would lead to a loss of tax to HMRC. Examples might include:

• An independent financial advisor (IFA) offering advice to a client that reduces inheritance tax liability;
• A freelance journalist who offers 10 Top Tax Tips in a newspaper; and
• Self-employed or partnership tax advisors and accountants who provide tax-saving information to their clients.

It was thought that the legislation would apply to specialist tax advisors and accountants only, but the experts claim the draft text deliberately casts its net wide to include anyone offering tax advice.

Another difficulty is the definition of “client,” which again can be viewed as being overly broad in its possible interpretation. The legislation fails to give a precise definition in terms of a business relationship, and therefore implies that even a personal relationship between the parties is sufficient to create an advisor-client relationship. Therefore, an individual or small business owner for whom such tax 'advice' may be an invaluable part of their information gathering process, could soon lose out.

The penalties cited in the draft law in relation to deliberate wrongdoing, however, are aimed directly at the errant tax advisor; there is no mention in the Schedule of how the person acting on the advice is to be treated.

The 'tax agent' would be liable to a penalty of the greater of 100% of the potential lost revenue, or GBP5,000. If the wrongdoing relates to more than one type of tax or affects more than one tax period, the penalty would apply to each type of tax or each tax period concerned. The penalty would be able to be reduced by up to 50% if the tax advisor discloses the wrongdoing to HMRC. There would be a right of appeal against HMRC’s decision.

HMRC has insisted that the new legislation is aimed at a “small minority” of rogue tax agents who advise clients in a deliberate, fraudulent and dishonest manner. An HMRC spokesman reiterated: “Tax agents play a vital role in the delivery of the tax system and the overwhelming majority advise their clients appropriately.”

“[The draft legislation] would only apply where there is deliberate wrongdoing meaning fraud or dishonesty on the part of the tax agent. It would not apply to anyone giving advice honestly, whether or not this reduces tax.”

Of course, this is only at consultation stage (the consultation ends on March 3), and HMRC may yet narrow down the remit of the draft legislation. But if not, anyone who advises others in relation to tax matters, whether professionally or on a personal basis, may have to take greater care to ensure the advice is accurate, while those receiving the advice may do well to seek a second opinion where there is any doubt.