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Tax law has become sexy — but lawyers need to be careful when advising clients

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The vice around tax avoidance and evasion is tightening

Tax is a hot topic at the moment, the recent Paradise Papers scandal exposing the details of what we already knew: that wealthy businesses and individuals use artificial structures to minimise their tax payments.

Appleby is the law firm that was responsible for organising many of the arrangements named in the Paradise Papers, a global firm renowned for its offshore finance work. Appleby insists it has done nothing wrong in managing the tax affairs of its clients. Margaret Hodge MP isn’t so convinced. In the House of Commons she said that Appleby “just did not give a damn, and nobody held them to account”.

Ethical questions are common in training contract interviews. How would you answer if you were given a scenario question where a client asks you to set up an artificial arrangement to minimise their tax bill?

The Solicitors Regulatory Authority (SRA) requires solicitors in England and Wales to “uphold the rule of law” and “act with integrity”, which does jar with the idea of helping clients evade tax. But the SRA also requires solicitors to act in the “best interests” of each client. So it would appear that you can advise your client on how to structure their assets to minimise tax payments, provided it is within the law.

But what actually is the law? The common assertion is that tax avoidance is legal, and tax evasion is illegal. The government says tax avoidance involves “bending the rules of the tax system to gain a tax advantage that parliament never intended”. (But law students will know that discerning the intention of parliament is no easy task.)

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This is part of the problem — tax avoidance covers a huge grey area, not helped by the media, who clearly don’t understand tax and are quick to condemn any wealthy person who they believe should be paying more tax then they are. Tax evasion is perhaps more clear cut, in that it is the illegal practice of not paying taxes (e.g. by not reporting income).

Setting aside the legality of these arrangements for a moment, do tax lawyers have a moral duty to deter clients from these schemes?

Leading anti-corruption lawyer Monty Raphael QC has said that lawyers have an ethical obligation to ensure they do not support white collar crime. Lawyers should uphold the rule of law, and some believe that even tax avoidance subverts the law’s intentions. But isn’t part of a tax lawyer’s job to help clients take advantage of loopholes, of gaps in tax legislation? It’s almost about lawyers being smarter than the legislators.

But isn’t this fair enough? It’s a lawyer’s job to design the best legal solutions for clients. Does it matter if those solutions are not within the ‘spirit of the law?’ You could argue it’s a moral issue for the client, not the lawyer. No one wants to pay tax — is helping clients avoid it really that bad?

On the one hand it has been argued by one tax litigator that it’s no surprise that wealthy people use offshore structures to minimise tax. The structures used are legal, and if the government wanted to stop them, they would legislate to do so.

But I don’t think it’s as simple as that. Lawyers need to be careful. The SRA published a warning notice in September, saying that solicitors who provide tax planning services will “face greater scrutiny” from the SRA and Her Majesty’s Revenue & Customs (HMRC). The notice said that schemes that were previously deemed legitimate could be reassessed by HMRC. From now on, advising on a scheme that is judged to be illegal may be seen viewed as poor conduct by the SRA.

Paul Philip, the SRA’s chief exec, has perhaps confused the position for lawyers further by saying:

“The government has been clear that the common assertion that tax avoidance is legal no longer applies.”

He didn’t provide any authority for this, and later he expressed concern over some solicitors “facilitating tax avoidance schemes aggressively in ways that go beyond the intentions of parliament”. So solicitors certainly need to be careful in their advice because of this turning tide on the legality and morality of tax avoidance.

It’s not just about avoiding SRA charges. New criminal offences were introduced in the Criminal Finances Act 2017 meaning lawyers may face prosecution for the failure to prevent the facilitation of tax evasion. I expect the vice around tax avoidance to be tightened further in the near future.

Apart from prosecution, law firms could be vulnerable to serious reputational damage if their clients are found to be using illegal or ‘immoral’ tax structures (which could be exposed by a cyber attack). Due to the media’s spotlight on tax, it is an exciting practice area. But lawyers need to take a careful risk management approach and ensure their moral compass is finely tuned to the tax-shaming culture of today.

Fraser Collingham is a University of Nottingham law graduate and future trainee.

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Please bear in mind that the authors of many Legal Cheek Journal pieces are at the beginning of their career. We'd be grateful if you could keep your comments constructive.

7 Comments

Gordon

What then are the thoughts on the changes on Wednesday 22 November 2017 to the so called “Disguised Remuneration” rules which mean that HMRC plan to ignore the decision in the Supreme Court in the case of Rangers FC and raise a loan charge on employees anyway with retrospective effect? https://www.gov.uk/government/publications/disguised-remuneration-further-update/disguised-remuneration-further-update

Anonymous

Eh? The Revenue won in the Supreme Court

Anonymous

That’s interesting.

In what way(s) does HMRC’s proposal about disguised remuneration ignore the Supreme Court judgment in Rangers FC v HMRC?

Anonymous

Appleby almost certainly will not have given any tax planning advice. Offshore lawyers are generally very careful to avoid doing anything of the sort – they stick to advising on and running the structures. The advice comes from lawyers and accountants in London (or wherever the tax to be avoided would otherwise be due)

Tax Guru

The writer seems to know very little about tax law; not surprising as he has not even started his training yet.

Most tax solicitors do not devise a tax avoidance mechanism or come up with ideas about ditching taxes – a lot of the work we do concern marking up tax documents (tax warranties and tax deeds) and advising on tax-related issues e.g. exemption, intra-group transfer, reliefs, structuring a transaction (e.g. hive down), etc. I think most tax solicitors (at least those I know of) actually advise against tax avoidance.

Can I suggest the writer refrains from writing on subjects that he does not have a clue about? Stop giving people the wrong impression about tax law when you have no experience about this area whatsoever.

Tax Guru

Just to add to that – it is always best to confine yourself to your expertise. For instance, my expertise is in corporate tax. I’d never venture to advise on SDLT because I do not know enough about SDLT to talk about it, let alone advising.

If you are a future trainee then stick to writing about applying for training contracts and tips for career events or stuff like that.

Gordon

The decision of the Supreme Court in Rangers FC established that the amounts were already earnings before they went into the trust. As such, PAYE is due by the employer(s).

If this is then taxed income how can the subsequent loans be taxable, yet HMRC plan to introduce a new tax to charge tax on loans as at 5th April 2019. The charge is to effectively capture all loans since 1999. So there charge is in effect retrospective and it appears to cut through the corporate veil to transfer the liability for PAYE to the individuals. This is not what was decided by the Supreme Court. HMRC are circumventing the legal process with a retrospective tax charge that seems to also ignore the corporate veil. HMRC previously acknowledge that some 40,000 will be affected and that some will be made bankrupt because of this new charge.

https://www.gov.uk/government/publications/disguised-remuneration-further-update/disguised-remuneration-further-update

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