Reasonable Excuse: Opining on Tax Avoidance

Lawyers have started to draw fire for their involvement in tax avoidance schemes. The Public Accounts Committee, chaired by Margaret Hodge, has issued a report which raises a number of concerns:

“Those who promote a tax avoidance scheme are required to notify HMRC of the scheme to comply with its disclosure regime. This has allowed HMRC to act quickly to close some schemes down. However, HMRC does not know how much avoidance is not disclosed but should be and has only issued 11 penalties for non-disclosure of a scheme. A small number of promoters appear determined to avoid disclosure and refuse to engage with HMRC. It is alarming that some QCs’ opinions are being used by promoters as a “reasonable excuse” for non-disclosure which prevents HMRC from applying a penalty.”

The report appears rather light on why the process is alarming. One passage of evidence caught my eye, however, as a possible explanation. Rather than seek to describe the nature of the witnesses business, let me quote the opening passage of his evidence to the Committee:

Aiden James: Yes, sure. First, I would like to thank the Committee for allowing me to join in on the debate on tax avoidance. My business is essentially set up to provide an independent review of tax avoidance structures in the market. We particularly specialise in income tax avoidance.

Q2 Chair: So you market yourselves as a tax avoidance business. That is your business model. You are in the business of avoiding tax?

Aiden James: Yes.

It is the following passage which is of special interest:

Q69 Mr Bacon: I want to ask you about the legal advice. The provider—the creator—has already taken legal advice and got an opinion from a QC before you look at it, but you are saying that, in some of those cases, you look at it and say, “We don’t think that that will work” so you do not introduce it.

Aiden James: Yes. Some structures rely on legislation that includes an avoidance motive test.

Q70 Mr Bacon: In so doing, you are essentially doubting the worth of the opinion of the QC, who backed the scheme, aren’t you?

Aiden James: A QC can only look at what is given to him to make that conclusion.

Q71 Mr Bacon: Do you think that the providers sometimes do not provide the full information, get the rubber stamp from the QC and then go out and market the scheme that contains things that the QC didn’t know about?

Aiden James: There may be certain assumptions that the QC works upon.

Q72 Mr Bacon: That turn out not to be correct?

Aiden James: It then becomes a matter of do you accept those assumptions or don’t you.

Q73 Mr Bacon: Or were you given the full information. Do you think that QCs are sometimes not given the full information? If they were doing their job, they would ask for it, wouldn’t they?

Aiden James: If there is an avoidance purpose test in the legislation, you are expecting there to be a commercial aspect within that structure. Does it need to be 5% commercial? Does it need to be 100% commercial? The QC is not going to give an opinion on whether he views something as being commercial or not. We would much prefer to promote something that does not have that level of subjectivity. Either it technically works or it does not.

Q74 Mr Bacon: Do you seek, do you obtain, your own independent legal advice on the worth of a scheme that some provider has created and had tested and looked at by a QC? Do you then go to a lawyer and ask separately what your—

Aiden James: We have resources within the team to do that.

Q75 Mr Bacon: But you do not go out and get a silk’s opinion.

Aiden James: I am trying to think of a situation where we may have done. Usually—

Q76 Mr Bacon: So what do you have—an in-house lawyer?

Aiden James: Yes, various staff.

The question of whether opinions have been given when questions about the basis of such schemes should be asked is not answered. That unanswered question raises a suspicion that some of the opinions given are not of the requisite quality be that through omission of the lawyers, failings of the client, or both. Mr James’ may not be in a position to answer the question. It is something which may bear investigation. If a tax adviser gets advice which it relies upon as not requiring disclosure, that advice is unlikely to be scrutinised. Similarly, any failing on the part of a barrister to ask relevant questions (if such a thing occurs) is unlikely to be scrutinised either. Yet, the reputation of the Bar is prayed in aid of the legality of the schemes where advice may have been given on hand-picked versions of the facts.

The standard and proper response to complaints about tax avoidance given by lawyers is that tax avoidance is lawful but evasion is not. In fact, the lawfulness of a particular tax scheme is often a matter of legitimate debate. Reporting and scrutiny mechanisms exist to ensure that debate is had. If it is right that tax advisers depend on legal opinions to inhibit the disclosure or, and scrutiny of those schemes, then it is vital that those opinions are given are of impeccable quality and independence. Lawyers in such circumstances are not simply acting as advocates of their client interests but as guardians of the rule of law. Their latter obligations are paramount; particularly in these circumstances. We do not know whether the problems outlined at in this evidence are in fact made out. We do know that questions have been asked and appear to remain unanswered. The SRA have signalled an intent to look carefully at solicitor involvement in tax avoidance schemes. Perhaps the Bar Standards Board should do the same.

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About Richard Moorhead

Director of the Centre for Ethics and Law and Professor of Law and Professional Ethics at the Faculty of Laws, University College London with an interest in teaching and research on the legal ethics, the professions, legal aid, access to justice and the courts.
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One Response to Reasonable Excuse: Opining on Tax Avoidance

  1. Michael Reed says:

    My (limited experience) is that barristers (include the tax bar) usually set out in their opinions a) the facts on which they’ve been asked to advise and b) what they’re not advising on.

    This is important, because, inevitably in this sort of advisory work, they rely on what their clients tell them and some of the relevant considerations are outside their expertise. For example, it may be highly relevant to the tax on a particular transaction whether the Spanish property being purchased is being bought at the market price. A London based Tax Barrister isn’t going to have any idea about the market price of a piece of Spanish property, so they can’t sensibly advise about that.

    Instead they’ll say something like ‘You have told me that this property will be purchased at €5 million. If this is a market price the tax will be X, if not, the tax will be Y. I cannot advise you about the market price of Spanish property. You may want to take advice from a property assessor, who can give you an expert view.’

    This sort of thing, it seems to me, is what Aiden James is talking about towards the end of his answers. A QC may have said that a scheme works in theory, but this is obviously meaningless if it hasn’t been implemented in the right way. Aiden has doubts about the way in which it’s been implemented, so he doesn’t advise his clients to use it.

    Has the QC done anything wrong there? Presumably, she has been asked a legal question and given the answer. She hasn’t answered another question, which she hasn’t been asked. Aiden isn’t doubting her advice — he’s doubting what whoever is running the scheme did after her advice.

    I can certainly see that this can raise ethical issues. Maybe the QC should insist on giving wider advice, not limited to the questions asked. I suppose there might be circumstances where this might be the case, where, for example, it’s clear that the QC is being asked an artificially constricted question with the intention to use the answer to mislead. But I’d have thought it would be rare that any lawyer could tell a client wanting advice on one aspect of a matter that they would have to insist on being instructed on a wider (and therefore more expensive) basis.

    The questioning, but not I think the answers, seem to suggest something else. That the information being given to the QC is being deliberately restricted in order to get the right answer on the question being asked.

    This is potentially an issue for the lawyer. Certainly, if they’re deliberately not asking relevant questions because they don’t want to know the answer, that may be a serious conduct issue. But that’s an serious accusation to make and there isn’t any evidence that it’s happening.

    The alternative is that the QC is asking the right questions, but being mislead by the client. If that’s the case, I’m not sure what they’re expected to do. They can, and I suspect do, ask the client if they’re sure or suggest that what they’re saying sounds a bit implausible. And warn them that, if the facts on which they’re advising aren’t right, their advice is useless.

    But should they refuse to advise if they suspect, but don’t know, that the client is lying to them? Should they investigate the client’s account? And, if they should investigate, how? Any of that would require a pretty fundamental re-write of the Code of Conduct.

    In any event, I’m not sure that there is any evidence that clients are lying to their tax advisers in order to get the right advice either.

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