Dealing with third-party claims for tax returns
By Chris Campbell, Head of Tax (Tax Practice and Owner Managed Business Taxes)
6 June 2023
With the activities of third-party ‘specialists’ on the rise, Chris Campbell reminds us of the ethical issues for members to consider when dealing with research and development and capital allowances claims.
We regularly receive feedback from members about the activities of third-party ‘specialists’ who carry out work on claims to be incorporated into the client’s tax return. Most commonly the work relates to claims for research and development (R&D) tax relief, but we are also aware of similar issues in respect of capital allowances claims.
What is ICAS’ position on third-party ‘specialists’ who may carry out work for clients?
As seen from the R&D claims market, whilst there are many professional agents working with integrity and specialist knowledge, there are also those agents who may be cavalier, at best, in their approach and who wish to take a percentage of any tax savings. Many of those rogue agents have no background in tax and no tax or accounting qualifications. Often their background and experience comes from working in sales, which they deploy in their marketing methods, cold calling companies and persuading them to make claims on a no-win, no-fee basis. These principles could equally apply in respect of capital allowances claims, especially where the client has carried out building works on their business premises.
ICAS responded to the House of Lords Finance Bill Sub-Committee call for evidence on proposed changes on R&D changes and made clear our desire for ensuring that abuse is tackled and compliance improved. Despite recent changes to administrative measures, we believe there remains scope for poor advice and unscrupulous advisers, because anyone may put themselves forward as an R&D adviser (regardless of qualifications or professional memberships).
We would ideally like to see a situation where activities such as R&D must be carried out by a member of a professional body adopting the Professional Conduct in Relation to Taxation (PCRT).
What issues do ICAS members who deal with routine tax compliance need to be mindful of?
ICAS members are required to adhere to PCRT. If you are responsible for routine tax compliance, you might be asked to incorporate third-party claims into your client’s tax return and it is important that you are aware of the PCRT requirements in this regard. PCRT has supporting help sheets to provide guidance to members and there is also a specific guidance sheet on R&D claims that you might find useful. Members have also reported back to ICAS that it is useful to be able to show the R&D guidance sheet to clients so that the client knows what is expected in relation to R&D tax claims.
Where the third-party adviser is a member of a professional body adopting PCRT, they will be required to adhere to the PCRT requirements. This remains the case, even though the third-party adviser is not submitting the tax return or assisting the client in respect of normal tax compliance. Where the client receives advice from a member of a professional body adopting PCRT, this is likely to have an impact on the quality of the advice provided, including maintaining appropriate professional scrutiny when identifying what constitutes qualifying expenditure under the legislation.
Where the third-party adviser adheres to PCRT, there would be an expectation that they would provide sufficient detail for the tax practitioner carrying out the routine compliance to correctly record the claim on the client’s tax return, including any necessary disclosures to substantiate the claim.
However, the issue in many instances is that the third-party party adviser is not a member of a professional body adopting PCRT, so the extent of their ethical obligations may be limited. Nevertheless, the decision by a client to use an unqualified or unregulated adviser for their R&D or capital allowances claim does not remove the PCRT obligations on the tax practitioner attending to the routine compliance. Help sheet A paragraph 13 makes clear that “a member should take care not to be associated with the presentation of facts they know or believe to be incorrect or misleading, nor to assert tax positions in a tax filing which they consider to have no sustainable basis” so it is important that they establish the salient points in order that they can form an opinion on the validity of a R&D or capital allowances claim.
PCRT makes clear that members must always act lawfully and with integrity and expect their clients to do likewise. The standards of tax planning also say that members must not create, encourage or promote tax planning arrangements or structures that (i) set out to achieve results that are contrary to the clear intention of parliament in enacting relevant legislation and/or (ii) are highly artificial or highly contrived and seek to exploit shortcomings within the relevant legislation. Help sheet B illustrates this using FAQs in relation to tax planning but are equally pertinent here.
In terms of best practice, it is important for the tax practitioner for routine tax compliance to exclude the provision of tax advice from the letter of engagement for the provision of tax compliance services. Any tax advice work should be the subject of a separate letter of engagement, whether from the same firm or a third party.
Where the client, either directly or following the advice of a third-party adviser, implements tax planning which the member thinks is ineffective, the tax practitioner for routine tax compliance must not make a claim on the client’s tax return. If you are in this position, you should highlight your concerns to the client and recommend that they take steps to rectify the position. Help sheet C explains the process in more detail. If the client refuses, whilst client confidentiality prevents notifying HMRC, you should cease to act and consider AML reporting obligations.
What if the client is unhappy with a refusal to include a third-party claim that is clearly incorrect?
Many clients will be influenced by the marketing and suggested tax savings identified by third-party advisers, who will try to sell the benefit of a particular scheme and draw attention to where a refund has been issued by HMRC. The issue of a refund does not however constitute acceptance or approval of a claim by HMRC. Indeed, HMRC may still re-visit an R&D or capital allowances claim in the event of an enquiry.
It is important to bear in mind that where HMRC identifies that a claim is incorrect, this could give rise to penalties for an inaccurate return being charged. This could be as high as 100% of the tax at stake, although this will depend on the level of co-operation with HMRC.
Notwithstanding the professional obligations on the ICAS member firm to comply with PCRT, even if the third-party adviser were to submit the claim directly this does not necessarily avoid the risk of HMRC enquiry, along with the associated interest and penalties. Whether they would provide support to defend such an enquiry is an issue that a client would need to ascertain from the third-party adviser.
Let us know your views
We welcome members’ input to inform our work on consultations or other tax-related matters – email us to share your insights and feedback. ICAS responds to many tax calls for evidence and consultations, as well as producing tax policy papers and reports. We also regularly attend meetings with HMRC at which service levels, delays and other issues are discussed, and we raise problems being encountered by members.
