How long does a client have to make a claim that they were missold a tax avoidance scheme that doesn’t work?
First of all, let’s remember that it can be many years before it becomes clear whether or not a tax avoidance scheme was effective. It may well have the benefit of Tax Counsel’s opinion that it is legal. That doesn’t mean it works. Tax Counsel will also have advised that, if all the facts in practice are in line with those in the ‘instructions to Counsel’, then “in his opinion” the hoped for tax savings should be achieved. HMRC are likely to take a contrary view and the real position will only become known after the Courts opine on the matter.
The Court of Appeal recently pronounced on a tax scheme promoted by PwC TEN years ago. I am sure that back in 2001 or 2002 Tax Counsel gave the sort of advice I have summarised above. Nevertheless this is the third time that the HMRC have won in the case of Howard Schofield v HMRC, as it has already been heard by the first tier and upper tier tax tribunals. The potential losses to the Exchequer, according to the media, were about £11m. (Actually the tax at stake was CGT on £10.7m).
It seems likely that around 200 other taxpayers who entered into the same scheme (being advised by PwC and Tax Counsel that it was LEGAL) will also be affected. The £100m or so of total tax they thought they had saved will now become payable plus interest. Whether they will be able to recover the fees they paid to PwC for the decade-old advice remains to be seen.
It would be naive to assume that all 200 taxpayers will now simply pay up the tax they thought they had saved. Some may look to claim that PwC did not give them adequate warning of the risks and caveats relevant to the tax planning involved in this scheme. The same thought will enter the heads of many other taxpayers who find out, in due course, that the Courts side with HMRC rather than agree with the Tax Counsel who blessed the tax avoidance schemes they paid a fortune to benefit from.
One tax specialist accountant I know now focuses on helping taxpayers who were missold tax avoidance schemes. The President of the CIOT recently indicated that he could see this day coming. It’s here already! Claims are being made against promoters and accountants (and financial advisers). Not just for negligent advice but also for retaining commissions contrary to the CCAB ethical guidelines.
The Spotlights page of HMRC’s website has long highlighted “tax planning advice to be wary of” (ie: where it seems to be too good to be true). And now we have HMRC’s latest publication: “Lifting the lid on Tax Avoidance Schemes‘. This confirms some of the points I have long been making re the risks inherent in certain aggressive avoidance schemes and the lack of certainty as to their effectiveness.
But let’s go back to my original question. How long do clients have to register a claim? The answer is ‘it depends’. It depends on their knowledge and experience. It depends on when they could reasonably have been expected to realise that their adviser had been negligent. A three year time period runs from that date. In the case of the PwC scheme referenced above, the three years may well have run out by the time of the Court of Appeal decision. This is probably academic as I am not suggesting that PwC were negligent. But clients may still allege negligence in the hope of recovering the fees they paid for the scheme.
I am doubtful that many dissatisfied clients will be able to recover the tax they now have to pay by alleging the scheme promoters were negligent. And this will be the same with almost all failed tax avoidance schemes. The reason is simply that the client is no worse off than they would have been had they not undertaken the tax scheme planning in the first place. Their only loss is probably the fees they paid for the advice and maybe the excess of the late payment interest they have to pay HMRC, over the investment return they achieved by holding onto the money in the meantime.
If you have clients who are waiting for the outcome of court decisions as to the effectiveness of tax avoidance schemes you may want to consider carefully how you advise them. And, indeed, whether you are competent to advise on this. And that brings me back to the Ten things accountants need to understand about tax schemes.
- Why weren’t all accountants promoting those tax schemes?
- Ten things accountants need to understand about tax schemes
- Is tax scheme advice comparable with investment advice?
- Accountants discouraged by ICAEW from advising on aggressive tax schemes