‘Tax Day’ - 23rd March 2021 - saw the publication of a HMRC consultation, ‘Raising standards in the tax advice market’. This followed on from a 2020 HMRC ‘call for evidence’ on;
- the scope of the market for tax advice and tax services
- the characteristics of good and bad practice
- current government interventions
- international models
- possible approaches to raising standards
The 2021 consultation ‘discusses the government's proposal to introduce a requirement for all those who provide tax advice to hold professional indemnity insurance (PII), and a definition of tax advice’.
Arguably this puts the proverbial cart before the horse because until tax advice is defined it is difficult to restrict its provision to individuals and firms holding PII.
The consultation doesn’t offer a definition of ‘tax advice’. The government ‘considers that the definition of tax advice should be drawn widely to encompass the wide and diverse range of activities and functions that can include tax advice.’ It does however list twenty examples of activities and professionals who may be providing tax advice (and helpfully point out that this is not an exhaustive list) including;
- a financial adviser, who in the course of providing investment advice to a client, advises on the most tax efficient ways to invest
- a financial adviser providing advice on long-term estate planning including setting up a trust
- a barrister providing an opinion on a potential avoidance scheme
- a promoter of a tax avoidance scheme
- an accountant preparing and submitting a corporation tax or self assessment return on behalf of a client
Many would agree that promoting or providing opinion on an avoidance scheme falls within any reasonable definition of tax advice.
Does the preparation and submission of a self assessment return involve advice? Is it simply not the collating of information relating to past events - income, allowances and reliefs from a previous tax year. When the self assessment return is being prepared the time or opportunity for advice has usually passed (at least in relation to that return).
Is a financial adviser who suggests that a client use an ISA wrapper for investment in collectives providing tax advice? Is that adviser giving tax advice when calculating the maximum amount that can be contributed to a pension whilst staying within the client’s annual allowance?
Is that adviser providing advice or merely guidance?
The FCA view is that in the context of financial services, “advice” is a service which recommends a specific course of action based on consumers' individual circumstances and goals. “Guidance”, on the other hand, provides information and/or options to narrow down consumers' choices, without making an explicit recommendation.
Presumably an adviser is one who offers advice. The term ‘tax adviser’ isn’t defined in the mainstream tax legislation though anti money laundering legislation has the following definition;
“tax adviser” means a firm or sole practitioner who by way of business provides material aid, or assistance or advice, in connection with the tax affairs of other persons, whether provided directly or through a third party, when providing such services.
Is there a distinction between ‘material aid’, ‘assistance’ or ‘advice’? If I offer to help an aged friend complete her self assessment I’m probably providing ‘assistance’, arguably ‘material aid’ but ‘advice’? Does that ‘assistance’ make me a tax adviser? What is the position of staff in the technical units of life assurance companies who provide financial advisers with assistance in relation to ‘chargeable event’ planning or the use of life assurance policies and trusts in inheritance tax planning strategies?
It is clear that the thrust of the consultation is aimed at developing a mandatory PII requirement for those coming with a wide definition of providers tax advice. There will of course be sanctions for non compliance.
Financial advisers will already have PII policies in place but do those policies cover ‘losses’ arising from the provision of tax advice?
The rationale behind the consultation is that the proposed system will offer greater protection to clients by providing a means of redress should ‘things go wrong’.
PII insurance premiums will differ between advisers and will be influenced by factors including the size of the practice and the complexity of the services provided. As a limited pool of insurers will face increased demand and a potentially riskier pool to insure, the cost of cover will rise.
This consultation has significant implications for financial advisers and it is to be hoped that many advisers contribute to it. The closing date for comments 15th June 2021.