As the government intensifies its campaign against tax avoidance, its efforts are starting to make a mark on the careers of tax advisers.
It is no secret that the government would like tax-avoidance experts to put their talents to other uses. What, asked a British official in a recent speech, “if all that creativity and ingenuity [of the tax-avoidance industry] had been used differently, to promote productivity and enterprise in the UK?”
But tax authorities are cautious about claiming victory over wily professionals. Has the behaviour of taxpayers and advisers really changed? Or are avoidance experts merely channelling their energies into avenues that have not yet been identified and blocked?
The case for scepticism was underlined recently by new research by David Earle, of the tax law review committee of the Institute for Fiscal Studies. It concluded that there had been some change in behaviour, but warned that “it was far from clear that it is permanent”.
The research, published in Taxation journal, asked law and accountancy firms for their views on the government’s disclosure regime introduced last autumn. This requires advisers to give details of an avoidance scheme to HM Revenue & Customs within five days of the scheme being “made available for implementation”.
An impression that there is still a potential appetite for aggressive tax avoidance was given by some firms when they were asked about their competitors. There were suggestions that niche firms with offshore connections were not complying at all with the disclosure regime and that some law firms were sheltering behind legal professional privilege and not disclosing. “It is thus possible that, over time, competitive pressures may encourage more firms to take a more aggressive approach,” said Mr Earle.
But, for the moment, large advisory firms are determined not to risk their reputations by becoming associated with aggressive tax schemes. Francesca Lagerberg of Smith and Williamson, who chairs the tax faculty of the Institute of Chartered Accountants of England and Wales, says: “It is a question of reputational risk. If you are a big four, or big 10 or big 20 firm, you do not want to have your name splashed over the newspapers.”
The government’s crackdown on avoidance and a new conservatism on the part of the corporate sector has damped the growth prospects for some tax advisers’ firms. Nonetheless, large firms are adapting to the new climate, with an emphasis on profitable areas such as transactions, relocation and buy-outs. “The lucrative tax work was never just avoidance,” says Ms Lagerberg.
The advisers are also responding to their clients’ growing focus on compliance. Ernst & Young has launched a “global compliance forum”, for senior finance and tax managers to discuss problems and best practice.
Deloitte, which set up an 80-strong group to deal specifically with tax risk in June, expects it to grow to 150-strong within two years. It says UK businesses have entered “a new era of tax management and compliance”. Companies are spending millions of pounds on improving their controls to meet the requirements of Sarbanes-Oxley, the US corporate governance legislation, and Deloitte is being asked to assess the technical and reputational risks associated with a company’s tax strategy.
Perhaps surprisingly, tax directors are relishing the emphasis on compliance, according to a survey carried out by Deloitte. It found that 55 per cent of tax directors perceived Sarbanes-Oxley and the processes concerning tax-risk management as of positive benefit to the tax functions.
More generally, Deloitte has tapped into a growing appetite of boards to know more about their company’s tax strategy and the associated risks. David Cruickshank, head of tax at Deloitte, says: “This has given tax a lot more profile in the boardroom.”
The growing conservativism of big companies was underlined by its survey, which found that the number of businesses describing their approach as conservative had increased from 17 per cent to 35 per cent over the past two years, while the number who thought themselves aggressive had declined from 23 per cent to 16 per cent.
These findings coincide with the publication of a new report by Henderson Global Investors, the fund manager, into the “finely nuanced approach” towards tax being adopted by some leading companies. They accept that paying tax unnecessarily may breach legal duties to shareholders. But they also argue that there is value from positive working relationships with tax authorities and a good reputation with government, customers, employees and the public.
Companies are including explicit requirements in their tax policies to comply with commitments on social responsibility. They are also ensuring explicit board discussion and approval of tax policies. Remarkably, Henderson found one big company that had decided to link the annual bonus of the head of tax with an assessment by HMRC of the company’s helpfulness, clarity and completeness in responding to requests for information.
It seems likely that concerns about the reputational risk posed by tax will tend to be concentrated among the biggest firms. Many small businesses and wealthy individuals are less deterred by the risk of publicity about their tax schemes.
Avoidance experts will, it seems likely, continue to find work. Moreover, on current trends, the government’s efforts to outlaw avoidance will lead to more complexity. And that will guarantee tax experts enough lucrative business to deter thoughts of a career change.
Nigel Eastaway, of Chiltern Group, concludes that the tax profession has little to fear from the government. “Actually, Gordon Brown [the chancellor] must be regarded as the tax advisers’ greatest friend because the additional complexity makes it almost impossible for anyone to get it right without a tax adviser.”
THE NEW CLIMATE
■HMRC wants “to change the tax landscape” by 2008, aiming to increase the risks of avoidance so much that it is no longer worthwhile.
■Large advisory firms are adopting a conservative approach to planning, while offering new services aimed at compliance and reducing tax risk.
■Large companies are becoming more risk-averse in their approach to tax planning. But some advisers do not believe these behavioural changes towards tax avoidance are permanent.
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