Raising Standards In The

Raising standards in the tax advisor market :A CAUSE FOR CONCERN

On 12th November, the Government announced that it intended to consult on making professional indemnity insurance (PII) compulsory for tax advisers, as part of a bid to protect consumers and raise standards in the tax advice industry. However, whilst the intention is clearly to improve the industry, it is important to consider that the knock-on effects from this decision may well do more harm than good.

Currently about 70% of tax advice is given by professionals who are members of professional bodies and are required by these bodies, to take out PII. The Government’s focus, however, is on the 30% of tax advisers who are not presently affiliated to a professional body and therefore are not required to carry PII. As part of its consultation, it is also considering giving HMRC additional powers to act against entities or individuals that aggressively promote tax avoidance schemes. Part of their potential powers will include the ability to shut down promoters and to restrict individuals from setting up phoenix companies.

The immediate concern for insurers is that once again, the Government is seeking to use PII as a way to regulate a type of business and protect the public, ignoring its prima facie purpose of protecting the insured businesses themselves.

Whilst PII provides an important safety net for professional businesses offering tax advice, as well as for their clients, the Government appears to be considering using the insurance market as an addition to its armoury in the fight against tax avoidance and the dark arts of ‘bad’ tax advisers.

So, what are the potential negative implications of this?

1.Identifying tax advisers is not straightforward

For insurers interested in providing this type of PII, identifying tax advisers may not be straightforward. The Government does not intend to include mere providers of tax services, such as payroll administrators and bookkeepers in its plans, however it could capture these organisations by mistake. Even when considering active providers of tax advice, the Government may need to create an exception to avoid catching organisations such as small charities, which often provide free tax advice to potential donors and bodies providing tax advice to those on low incomes.

2.Forcing insurers into a regulatory role may also stifle creativity

Few insurers today would voluntarily choose to underwrite firms advising individuals on the tax benefits of film finance schemes, yet many successful films were funded in this way, including Atonement, Avatar and Life of Pi. In light of this, it may be difficult

to determine if a tax arrangement is “highly artificial” or “highly contrived” until after the event, and, of course, much tax advice seeks to exploit the complexity of UK tax legislation as well as legislative shortcomings. Therefore, insurers are likely to apply standards conservatively and there is a risk that some legitimate businesses may be unable to find cost-effective cover.

3.Risk of rejection from the insurance industry

In a hardening market, there is also a risk that the insurance industry will reject the quasi-regulatory role that the Government is seeking to force upon it, by indicating that it is simply unwilling to cover the types of activity that the Government would like to see covered. While this would drive many incompetent and unprofessional advisers out of the market, a form of Kitemark involving minimum standards of education and continuing professional development could potentially achieve the same outcome at a lower cost to consumers.

4.Unofficial activity may increase

Given the economic conditions we are facing, particularly in light of a recession, the lure of increased short-term cash flow offered by some tax planning arrangements may prove too tempting for some businesses and individuals. The result of this could be an increase in businesses and individuals falling into the trap of paying for tax advice that is both bad and without insurance.

Whilst the Government is clearly trying to regulate the market and protect consumers, instead of using PII as a way to regulate a type of business, they should be strengthening the powers of regulators to manage both entities and individuals. In doing so, this would remove the risks outlined above whilst also protecting consumers, tax advisors and insurers themselves.