Archive for the ‘Tax related’ Category

Talking with a tax and financial adviser recently he told me that his firm is a heavy promoter of tax schemes. “Not a great fan myself“ I said. His reply was almost the complete opposite of what I had expected:

“I’m not surprised” he said. “Few people actually go ahead and implement the schemes.”

“So why do you promote them so heavily?” I asked.

“Simple. It gets people through the door. We tell them what they could do and then when we explain the risks they just don’t have the appetite. But they like our approach and become clients anyway.”

This reply reminded me of the conversation I had in the Spring with the head of tax at a reputable tax consultancy. After he has explained the detail of a tax scheme to his clients they invariably say:

“Now I understand it properly, why would I want to go into a scheme like that?”

I explained this further in a post on the TaxBuzz blog: “Have a look at this scheme and tell me what you think”

Coming back to my tax advising IFA. Would you feel comfortable leading with a superficially attractive service offering if experience tells you that most prospects will reject it – albeit they may choose a different service?

I mentioned the Tax Advice Network in a recent post for the first time in ages. Newer readers of this blog who haven’t read the mini profile piece (top right), may be unaware of the Network.

Established in 2007 the Tax Advice Network is a resource and facility for accountants in practice. There’s no charge for sourcing an independent vetted tax adviser through the Network. You can do this whenever you hit a tax problem, challenge or situation that’s outside your comfort zone. Every accountant has such situations – occasionally at least.And the Network website enables you to quickly access a tax adviser with the relevant expertise and in the right area.

Perhaps even more relevant to readers of this blog is the weekly newsletter published by the Tax Advice Network. It’s free to register for this: Every Thursday you will receive the newsletter containing 3 practical, timely and commercial tax tips with advice and relevant links – written specifically for general practice accountants.  It’s unique and highly regarded by those who receive it.

Ok. Adverblog over. Back to conventional blog posts tomorrow.

It seems that many in-house Tax Directors do not use their auditors for tax work and advice.This is one of the conclusions from Winmark’s third benchmarking survey of in-house Tax Directors.

Out of over 100 respondents to the Tax Director Network survey, only one-third use their auditors for corporate tax planning, and only a quarter use their auditors for international tax planning or even tax disclosures in the accounts.

Many Tax Directors also made clear why they prefer to obtain advice from other Big 4 firms. Tax Directors cite conflict of interest, the need to obtain audit committee approval and the level of fees involved. Higher costs arise when the auditors have to obtain second opinions where they cannot audit their own firm’s advice and that advice could have been obtained at lower cost elsewhere.

Two-thirds of the Tax Directors who responded to the survey use external advisers other than their auditors for corporate tax planning. Even more use other Big 4 firms for VAT advice and over half use other Big 4 firms for international tax planning.

When I was in practice, all the talk was of ‘cross-selling’ additional services to audit clients. Clearly this no longer a worthwhile use of time and effort – at least as regards larger corporates.

Are FDs in medium-sized companies (ie: those without in-house tax directors) as reluctant to seek tax input from their auditors I wonder?  If that were the case then what is the future for firms outside the Big 4  who expect to cross- sell to their audit clients? Should the focus be on other services rather than tax advice?

There is an ever increasing need for auditors to be seen to be independent. This survey suggests that the number who are able and willing to audit the impact of advice provided by their tax colleagues will continue to fall.

Copies of the executive summary of the survey report are available on request from Winmark Research. The full report will only be available to members of the Tax Director Network and to others who completed the survey.

Every now and then I hear about general practice firms of accountants which have determined that they want to provide a higher level of tax service to their existing clients. This is often the case in more forward thinking practices where the partners recognise that they are limited in their own abilities and that they need someone else to check out their files for tax planning opportunities, to put tax advice in writing and to attend meetings with clients to provide a more tax focused service.

Provide tax schemes?
Boosting the firm’s tax capability can be a worthy objective although sometimes it’s a euphemism for offering tax schemes and products. I addressed this issue in a recent blog post: Selling tax schemes is NOT a route to riches.  If the partners do not understand this they WILL be disappointed.

Tax manager
Some firms recruit a tax ‘manager’ in the hope that he or she will fill the gap. And if the firm is lucky this may well happen. I always wonder however in such cases – How do the partners know that the tax specialist’s advice is correct? If there is no one else in the firm with the requisite expertise, this is a big risk, especially with a relatively inexperienced tax ‘manager’. Often they may feel under pressure to impress their new partners – especially if the carrot of ‘partnership’ depends on the partners’ perception of their performance. Again I addressed this in a recent post: Confidence is good – but not if it’s naive or deceitful.

If the new recruit causes a problem – which will often only become apparent down the line – either the partners will have to bear the loss or their PI policy will suffer a claim.

New recruits are also an expensive option. Over and above the recruitment costs and induction time it can be a while before they start to pay their way.

Merge with or takeover a tax only practice
I was asked my views about this possibility recently. I suspect it’s a dream that will rarely be realised. Tax only practices are generally set up specifically to avoid the distractions of providing accounting and auditing type services. Why would a successful tax practice want to merge with a general practice firm of accountants?

If such a merger or takeover occurs the tax specialists are likely to want to reduce the risks to the practice of general practice partners providing tax advice without it first being ‘checked’. This will often give rise to conflicts as the general practice partners are not used to having their advice double checked or to being constrained as to what they can advise on.

Merge or takeover a one-man band tax specialist
This idea suffers from much the same downsides as have already been mentioned. It can be worse however as there is the added risk of the individual retiring, dying, going sick or leaving shortly afterwards. Although such risks may be considered small the prospect of one of these may have been the prime motivation for the tax specialist agreeing to the deal.

The partnership will want to limit the upfront costs of recruiting a tax partner by requiring that the new person has a following. However very few tax specialists with a following would feel comfortable taking their clients into an environment that has not previously provided clients with specialist tax advice.

If the tax specialist or partner does join the firm their focus will be on their existing clients. What will motivate the specialist to make time to explore opportunities to provide tax advice to the firm’s existing clients?

Tax contractor support
In my view this is the best solution – at least as a first step towards building in-house tax expertise.

It will often be easy to identify someone who has the requisite expertise and is available to help out on a part-time basis. They remain self employed and provide their services to the firm on a contract basis, perhaps one day a week for a few months.  This option is also more cost effective for the general practice firm as they bear no employment related costs. In the event that any problems arise the relationship can be terminated quite quickly and any claims made will be against the contractors’ PI policy.

It may be that more then one such specialist can be identified – perhaps one to focus on IHT issues, one on VAT and one on corporate tax matters. (There are many other such topics too of course).

Multiple adviser tax support
Whichever route a firm follows they should appreciate that, these days, hardly any tax adviser can cover off and advise on all tax matters. If you have just one or two in-house  senior tax specialists, you should expect them to want to seek confirmation or support from a third-party ever now and then.

Tax Advice Network
This supportive network provides over 2,500 accountants with access to dozens of  vetted independent specialist tax advisers across the UK.  These tax advisers are categorised by their areas of expertise and location.

You can contact any of them for specific,  general or tax contractor support as described above.  And yes, as implied above, much of the time these independent tax advisers are providing second opinions and support to the tax specialist managers and partners in firms, as well as to general practice partners.

I recently blogged about the 5 things accountants can do to make more profits. Selling tax schemes was not on the list. Why not?

Quite simply because the idea is vastly over rated, over hyped and mis-understood. (Typically by non-tax specialists).

There are plenty of people who will tell you that you can generate a good commission whenever you persuade a client to ‘invest’ in a structured tax avoidance scheme. They are right. Such schemes are (usually) legal and fully disclosed to HMRC. So what’s the problem?

Let’s start with the need, for most qualified accountants, to comply with their professional body’s fundamental ethical principles. These include acting with integrity, objectivity and professionalism. Clearly this means only advising on things you understand and being clear that the prospect of commission is not uppermost in your mind when advising clients.  Of itself this does not preclude you from advising clients to consider structured avoidance schemes. But it’s worth bearing in mind in the context of the following points:

1. Encouraging a client to undertake a structured tax avoidance scheme is much like encouraging them to make a specific investment;
2. It takes a fair amount of time to get to grips with all of the relevant details of a structured tax avoidance scheme;
3. HMRC may announce a change in the law at any moment – leading to rushed (and perhaps botched) attempts to revise the scheme by the promoters;
4. Having committed all that time to learning about the scheme there may be a temptation to persuade someone to ‘invest’ even if they might not otherwise choose to do so;
5. If, some years later, the scheme is ultimately held not to work the client may sue the accountant for failing to adequately highlight the risks.
6. Accountants should only promote such schemes if they are confident that they understand ALL of the risks and consequences for their clients;
7. Accountants who promote such schemes honestly will find that typically only around one in ten clients will proceed once they understand all of the risks;

And it is this last point that explains the principle reason why I say that selling tax schemes is NOT a route to riches. Perhaps things were different ten years ago, before DOTAS, before the Courts adopted a more principled approach to legislative interpretation and before HMRC started to adopt such an aggressive response to tax avoidance schemes.

These days though there is plenty of evidence that when clients are fully appraised of the risks and downsides of schemes, they say things like:

“Now I understand it properly, why would I want to go into a scheme like that?”

And, just as I concluded a few years back, there is a limit as to how much you can charge a client in such circumstances for the time and effort involved in reviewing, checking and advising on the scheme – especially if the client decides not to proceed. This is one of the reasons that promoters pay high commissions. It is partly to compensate for all of the conversations and meetings that do NOT result in a client signing up for the scheme.

If you are focused on generating more profits there are many more productive ways to spend your time than learning enough about tax schemes to be able to promote and sell them to your clients.

I have written more extensively about the risks and downsides of tax avoidance schemes on the TaxBuzz blog.

One thing that most accountants have to face is a desire on the part of their clients to pay less tax. In this context it can be helpful to ensure that clients appreciate what is and what is NOT possible/achievable.

For example is it legal to legitimately minimise your tax liabilities. This includes:
•    Claiming all available allowances and reliefs
•    Claiming tax relief for expenditure incurred “wholly and exclusively” for business purposes
•    Planning your affairs to keep your tax liabilities as low as possible within the law

On the other hand it is ILLEGAL to deliberately/dishonestly evade tax. This includes:

• Claiming tax relief for non-business expenses;
• Telling untruths on your tax return or in the way you describe transactions;
• Failing to include all of your taxable income in your accounts;
• Withdrawing money for personal use from an incorporated business (company) and not making any attempt to make sure it is treated correctly for tax purposes;
• Failing to declare all of your taxable income and gains on your tax returns;
• Failing to ask for or to complete tax returns to report your taxable income and gains.

The consequences of illegal activity include: Revenue investigations, back taxes, interest on late paid tax and penalties (up to 100% of tax), time, hassle, professional fees, and if you’re very unlucky, ill-advised or stupid – prosecution and prison.

Clients also need to understand that if they get involved in structured tax avoidance schemes they are also highly likely to suffer a tax investigation – even though the scheme may be legal and fully disclosed.

I almost admire one promoter who told me his approach. Apparently he explains that clients who would be worried sick by the inevitable Revenue enquiry, the letters, the demands, the time it takes to resolve and the inconvenience should NOT get involved in his schemes – even though he claims they are legal, have full Counsel’s opinion and are fully disclosed to HMRC.

He manages clients’ expectations and makes clear that the enquiries often last 3 – 7 years; and even though he claims they are usually resolved in favour of the taxpayer, he admits there are no guarantees.

I always mention this issue in my talks on ‘How to avoid professional negligence claims and worse‘. If clients have been forwarned as to what you can and can’t do there is less chance of them subsequently complaining.  In this context though I would refer you to an earlier post on this blog. (I told him. Once. 12 months ago. How dare he forget). It contains a salutary warning.

What do you do to manage your clients’ expectations? Please add your comments to this blog post.

Let’s face it, few accountants have detailed procedures in place to ensure they do all they need to do when they lose a client. The simple reason for this is that it doesn’t happen often enough to warrant a detailed procedure and even when it does occur there’s rarely a problem.

The larger firms lose more clients across the board and tend to have procedures in place to reduce the prospect of problems arising down the line. One of these procedures is a proforma disengagement letter.

This is a concept that I frequently advocate during my talks on ‘How to avoid professional negligence claims and worse’. Simply stated the use of such letters can help minimise the prospect of continuing liability to ex-clients and also to those who do not reply to requests eg: for information required to complete tax returns or accounts.

What should be addressed in a disengagement letter? I suggest the following:

• A summary of services provided up to the date of ceasing to act;
• A note of any further action to be taken by the adviser;
• A note of any outstanding matters that either the ex-client or the new advisers will need to address;
• Details of any impending deadlines and the action required;
• The adviser’s willingness or otherwise to assist the new advisers resolve outstanding issues with HMRC or others; and to provide copy papers to the new advisers or to allow them access to files;
• If relevant, details of any outstanding fees; and finally
• A note indicating that the adviser has told HMRC that he is no longer acting for the client and that until further notice all correspondence should be sent only to the taxpayer.

Anything else? Please share your veiws as comments on this blog post.

Probably the most sensible thing any adviser can do is to recognize their limitations.

Most accountants are like GPs. Great at dealing with day to day issues. Every now and then though when you visit the doctor they recommend you see a specialist. Indeed you’d be very worried if the GP suggested you hop up on the bed so that he can remove your kidney, operate on your back, undertake a brain scan or whatever.

In the same way there is no shame in admitting to clients that occasionally you have to involve other specialists to ensure that the client gets best advice. This will invariably enhance your relationship with clients than either of the alternatives:

• Avoiding the issue – to avoid revealing your lack of knowledge/experience;
• Guessing and using the client as a lab rat (test subject) and risking the consequences of giving incomplete or incorrect advice

When you need a second opinion or want to refer work to a specialist, obviously I would like you to choose one of the vetted independent specialist tax adviser members of the Tax Advice Network.  The options however include:

• Tax expert colleagues in the office
• Colleagues in other offices
• Tax expert friends at local events
• Professional fees insurer
• Tax Faculty referral scheme
• Business Mentor/coach
• Larger accountancy firms
• Larger tax consultancy
• Independent external tax support – such as Tax Advice Network

It’s also worth noting that the Guide to Professional Conduct, applies to all members of the largest professional tax and accountancy bodies. It states that:

“Members will from time to time find themselves having to advise on matters which require specialist knowledge. In such circumstances they should be careful not to go beyond their own level of competence and, if necessary, should seek help from a specialist in the field”.

This was the message to accountants in a press release issued last week by the Tax Advice Network.   In it I warned that:

Accountants across the UK are likely to see a surge in requests for Tax Credit advice from couples considering getting married following the release of a controversial report highlighting the failings on the current Tax Credit System for married couples.

This followed on from The ‘Individualists Who Co-operate’ report issued last week by Civitas.

In fact I have been suggesting for some time that More and more accountants will find themselves having to advise on tax credits.

And this is also a  point I invariably make in my talks about How to avoid professional negligence claims and Mastering the Credit Crunch.

Question one
I always ask for a show of hands as to how many accountants in the audience advise clients about their entitlement to claim tax credits. I’ve spoken to groups of all sizes, from 20-180 and to date no more than 5 hands ever go up. This suggests to me that the vast majority of accountants are not currently advising clients about their entitlement to claim tax credits.

We know why don’t we. They are merely a new(ish) dressing for a social security benefit. Accountants have not traditionally advised on benefits. It’s not cost effective to do so and we don’t know all the rules. Some, but not all, accountants make clear in their engagement letters that they do not advise on tax credit related issues. That is their prerogative and in so doing they probably reduce the prospect of a client making a successful claim for negligence at a later date.

Question two
I then ask the accountants whether they advise their clients on how best to offset losses, on Capital allowance disclaimers, pension reliefs and (now) Annual Investment Allowances (AIA). Of course they all do. Indeed, securing tax refunds tends to go down well with clients. In fact, clients tend to value anything their accountant does that reduces the tax payable or that secures the biggest tax refunds. And if they perceive that their accountant isn’t doing all they could in this regard, they are inclined to switch to one who does.

Question three
So what happens if the loss claim, the AIA or other advice reduces the client’s income to a level whereby they would be entitled to claim tax credits?

So far as clients are concerned, tax credits are TAX credits.This means they are seen as TAX refunds. Exactly the sort of thing that clients expect to get help on from their accountant. And if their accountant doesn’t help in this regard then it won’t be long until the client switches to one who does. Especially if the client becomes aware that he missed out on claiming tax credits as his accountant didn’t tell him when he should have done so. (The 3 month limit on ‘back claims’ is a real problem here).

If the commitments I note at the end of my seminars and training sessions are anything to go by, an increasing number of accountants will be advising clients on their entitlement to claim tax credits. It doesn’t have to be time consuming and it can be done profitably.

Anyone know how much a client could claim in tax credits this year if they registered for them from April and , as a result of AIA (or losses) they have no taxable income this year? Assume partner has no income and there are 2 children.

—

If you’re on Twitter you can tell your followers about this by clicking here to: Tweet a link to this blog post. You can send the tweet, which contains a shortened link, as is or edit it.

And you can follow me @bookmarklee and @TaxAdviceNet depending on your interest.

I’m told that this is the view of a senior Insolvency practitioner. What does that say about the advice being provided by accountants?  Are they just missing out on opportunities or are they failing their clients? I’d like to hope that this doesn’t apply to any of the regular readers of this blog (if there are any!)

In  a recent posting on this blog I suggested that: Accountants need to show they really are business advisers as we move into recession.

Let me take that idea further and offer a theory I have developed. It’s drawn from conversations with many accountants over the years.  It’s not a universal truth but it may explain the statistic above.

Most business clients go to an accountant because they want to pay less tax not because they want a set of accounts. To the extent that the business owner wants the accountant to do accountancy work it’s largely because they need their accounts for the bank, for their funders and for the taxman. And many accountants are happy to focus on providing these backwards looking tax and accounting services.

The challenge is for the accountant to help their business clients appreciate the need for effective financial management before it’s too late.  If you look at accountancy firm websites and promotional material however this is not an area on which many of them focus.  And they aren’t well placed to ’sell’ such services to new clients as an additional spend over and above the quoted fees for the traditional compliance work – unless the business is already in financial difficulty, in which case it could all be too late.

Many accountants would prefer to focus on providing the traditional services that they have always provided year in and year out.  Expanding into the provision of additional services might mean first devoting time to developing additional skills so as to be confident that the advice they provide will be worthwhile.

When clients require tax advice that is outside of the accountant’s area of expertise they can involve external specialists (eg: at the Tax Advice Network). But what about when a client needs solid help to implement effective financial controls? Rather than ignore the situation the accountant could outsource the provision of advice in effect by engaging an independent specialist who has the expertise, experience and time to work with the clients who need help.  My friend David Lewis for example.

I should also stress that even when the accountant offers to assist in the preparation of regular management accounts this is still not the same as helping the client implement effective financial management controls and procedures.

It seems likely that far too many corporate insolvencies can be attributed to poor financial management (whatever is the true statistic). Are accountants to blame or are they simply missing an opportunity to help their clients and to earn valuable additional fees in the process.

What do you think?