Sanctionable conduct: Are accountants and tax advisers in the spotlight?

We interact frequently with other professionals in our industry, including lawyers who deal with criminal tax investigations.

While nothing entirely new, it seems there is a shared sentiment that HMRC currently has a bone to pick with ‘rogue’ tax advisers and accountants.

However, the bar for what HMRC chooses to pursue as ‘rogue’ may be lowering.

Despite HMRC not having to prove cases to the higher criminal standard used in courts, it is now able to penalise tax advisers for conduct that appears to be criminal.

Instead of judging behaviour based on the criminal standard of ‘beyond all reasonable doubt,’ HMRC adopts the civil approach of ‘balance of probabilities.’

A few infamous cases from the past

HMRC has always pursued accountants and advisers who have done the wrong thing.

As a notable example, accountant Christopher Lunn was jailed for including fictitious expenses in many of his high-profile clients’ tax returns.

While those clients were apparently unaware, they had to pay back their underpaid tax to HMRC.

A tax dispute adviser, named Martyn Arthur, was convicted and given a suspended sentence for underreporting his own income.

Khalid Javid, an accountant, was handed a community payback order and instructed to complete 250 hours of unpaid work. This followed his guilty plea for recklessly submitting false VAT returns on behalf of two of his clients. His clients were then jailed for the fraud.

Joseph Logue, a tax agent, pocketed refunds from genuine and bogus self-assessment returns he submitted on behalf of clients.

In 2023, he was convicted and sentenced to three years and nine months in prison.

There are many more examples.

Soaring too close to the sun: A warning to accountants

The examples mentioned above are all serious, each resulting in substantial criminal sanctions.

However, put yourself in the shoes of an accountant in this scenario.

Your self-employed client has just provided you with all their income and expense details for the year for you to prepare their self-assessment tax return.

Within their expenses, you spot £15,000 for the purchase of a high-end audio mixing desk. You naturally question whether this is really an expense of their plastering trade.

In response, you are told that the client sometimes takes videos of their completed projects for promotion on their business website. The audio desk was therefore intended to help with recording voiceovers.

To test out your suspicions, you check their website and it has just a few photos, which makes their explanation implausible.

While you believe this is clearly a personal/hobby purchase, the client is assertive in their reasoning.

To not cause any further disputes, you leave the expense in the Profit and Loss account, even though you are aware that the tax payable will now be too low.

For reassurance, you tell yourself that any enquiry from HMRC will be directed towards your client, not you.

However, where would you really stand if HMRC were to enquire? How often do situations like this happen in practice?

Moreover, what would happen if you told them the expense isn’t allowable, but suggested it could be left in because it is unlikely to cause problems?

Sanctionable Conduct – Schedule 38 FA 2012

Continuing the example above, HMRC might pursue a criminal investigation into the accountant for fraud, as the accountant likely ‘knew’ the expense was illegitimate but chose to include it.

While the numbers might be relatively small, HMRC occasionally pursues small value cases criminally to send a message to other accountants.

Without evidence of discussions between adviser and clients, it might be difficult for HMRC to prove ‘beyond all reasonable doubt’ the accountant was knowingly complicit in fraud.

Nevertheless, HMRC may still decide to pursue the matter on a civil basis.

Schedule 38 of the Finance Act 2012, which allows HMRC to penalise tax advisers for dishonest behaviour, has been expanded.

What classifies as ‘sanctionable conduct’ can now be applied to a broader range of behaviour that HMRC considers serious enough for a penalty.

In short, sanctionable conduct is where a tax adviser, or anyone who assists others with their tax affairs, does something with the intention of bringing about a loss of tax revenue.

The legislation specifically states that it does not matter whether the adviser was acting on the instruction of their client.

If found culpable, substantial penalties can be imposed by HMRC. Alongside minimum penalties of £7,500 and up to 100% of the tax lost for repeat offences, the accountant’s details may also be published.

The previous example would likely be covered by these provisions, even though the adviser didn’t pro-actively encourage the inclusion of the expense.

All HMRC would need to do is prove its case based on the balance of probabilities.

What this might mean in the future

As we have seen, in recent years HMRC has consistently pushed for penalties at the highest level.

It would therefore be unsurprising if the amended Schedule 38 soon becomes the new weapon of choice.

If behaviour in relation to errors in tax returns is frequently argued as deliberate, HMRC might use the broadened scope of this amendment to argue wrongdoing.

It is important for everyone in the accounting and tax industry to be mindful of this, so they can prepare for the additional scrutiny.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email info@intaxltd.com.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. However, we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients.