Enter Your E-mail

VAT Voice by Andrew Needham

Andrew Needham, Director of VAT Solutions (UK) Ltd, outlines the limitations of professional privilege for non-legal advisers, and how the effects of those limitations can be minimised.It has always been recognised that legal advice was protected by ‘legal privilege’, and for the most part, it was thought that this also extended to confidential advice from other professional advisors. In many ways, this was recognised by HMRC (HMC&E as was) in Notice 700/47 ‘ Confidentiality in VAT Matters’, where it was stated:

“Customs recognise that tax advisers have a duty of confidentiality to their clients. Whilst the duty of confidentiality may sometimes be overridden by legal requirements, Customs will not normally request the tax adviser or the trader to produce a communication relating to confidential opinion or advice”

Engagement and advice letters

Recently, a taxpayer, Burghill Valley Golf Club, was asked by HMRC to produce engagement letters and advice letters from their tax advisers, as it was suspected they had implemented a tax avoidance scheme allowing them to obtain VAT exemption for their membership income. The taxpayer obtained legal advice that said that HMRC did not have the powers to demand production of these documents, and so refused to produce them.

HMRC fined the taxpayer for failure to produce records (para. 7(2), Schedule 11, VAT Act 1994), and so Burghill Valley Golf Club subsequently appealed to the VAT Tribunal (No 18,876).

Suffice to say, the Tribunal found in favour of HMRC. They ruled that under current law, the right of privilege only extends to documents passing between a solicitor and his or her clients. No such privilege attaches to documents from other advisors. They also found that HMRC could demand any documents that they saw fit from a taxpayer through a written notice of production, and failure to do so made the taxpayer liable to a penalty.

Minimising the impact

This decision has effectively extended the powers of HMRC to examine confidential correspondence between a taxpayer and his advisors.

However, there are ways of minimising the impact of this decision if you want to maintain the confidentiality of the advice given. The first point would be to make engagement letters and fee notes vague. Rather than explicitly stating that you will be providing advice on the implementation of a specific piece of tax planning advice, just use a general engagement letter stating that you will be providing general tax advice, and the same goes for fee notes. By doing this, you will not automatically tip off HMRC, albeit that you are obtaining perfectly legal tax advice with a view to legitimately reducing your VAT liability.

Secondly, in respect of advisory letters regarding the structuring of specific transactions (e.g. the sale or purchase of property), rather than stating which structure should be used and highlighting the advantages of doing so, you can provide the alternative treatments with no written advice as to the recommended method. This could take the form of a ‘key facts’ report. Then, at a later meeting, you can work through the options and draw the client’s attention to the preferred method so that there is no written advice specifying one method over another, and drawing the attention of HMRC to that area.

It is also helpful to avoid contingency fees that are based on a percentage of savings, as these will automatically draw the attention of HMRC to the existence of a tax planning arrangement. This would avoid the argument put forward in direct tax cases that it is a ‘scheme of arrangement’ whereby both parties to the advice obtain a financial advantage from its success.

Andrew Needham
Director, VAT Solutions (UK) Ltd
Email: andrewneedham@vatsolutions-uk.com

VAT Solutions (UK) Ltd
11 Winmarleigh Street,
Warrington,
WA1 1NB

(T) 01925 242497
(F) 01925 242498
(M) 07810 433927
(W) www.vatsolutions-uk.com

VAT Solutions (UK) Limited is an established independent firm of Chartered Tax Advisers, formed by Andrew Needham and Steve Allen. The company has a cross-section of clients from multi-national companies through to medium-sized and numerous smaller regional firms of accountants and solicitors. They produce a regular publication 'VAT Voice', which can be downloaded directly from the Internet via the following address: www.vatsolutions-uk.com/newsletter.doc