With HMRC paying extra attention to the tax affairs of smaller businesses, there’s no better time to prepare for the worst.
As part of a crackdown on tax evasion, research from UHY Hacker Young found that during the 2016-17 tax year, HMRC collected an additional £474 million in corporate tax, a 5% year on year increase. This was as a result of more investigations into small to medium businesses.
Those investigations could end up extending to your client list. Your clients may have questions or gaps in their knowledge about tax avoidance and evasion so it’s important for accountants to be able to give advice or even warnings wherever necessary.
Conversations to have with your clients:
These will largely depend on how well versed in accounting, tax and business your clients are but it’s best to be prepared to give advice and answer questions anyway. You might even want to create informative resources to help your clients understand.
The difference between tax avoidance and tax evasion
It’s easy for people to get confused between the differences. So it’s important to explain which is legal and which isn’t while also highlighting tax avoidance as a particularly tricky area. While some tax avoidance schemes might be technically legal, it’s still a grey area and could potentially be a dangerous game to play.
If clients are coming to you with details about tax avoidance schemes they are considering, you’re probably going to be safer to advise them against it. Accountants or lawyers who get involved with these schemes could end up facing a 100% fine.
In light of the Panama Papers scandal, a new tax dodging task force was led by HMRC and the National Crime Agency to investigate allegations of tax dodging and money laundering last year.
Though legitimate tax avoidance measures like using ISAs or tax breaks for pensions aren’t being targeted, measures which involve bending the rules to gain a tax advantage that the Government never intended, are.
Highlight the reputation damage
Tax avoidance and evasion has been in the news a lot and the public is not a fan of businesses that try to get out of paying tax. Even if a business isn’t avoiding tax on the scale that major corporations are, it still leaves a sour taste in the minds of consumers.
This survey from YouGov showed that one in five consumers have boycotted a brand. Their top reason for doing this was tax evasion, with 48% saying they have boycotted over this reason. While the study showed that people were likely to return to the brand over time, they didn’t do as much as before the scandal.
Be prepared for a tax investigation
One of the warnings against tax avoidance you can give your clients is that they may be subject to a tax investigation. If they are investigated and found to be evading tax, this will result in fines, a bad reputation and possibly worse.
The potential penalties of getting involved in tax evasion or avoidance schemes are not worth the risk. Those who choose to take part in a tax avoidance scheme are more likely to be caught out by HMRC nowadays. Not only will they have to pay the tax they owe, they’ll also have to cover legal fees and penalties of up to £5,000.
Beyond financial penalties, tax evaders could even end up with prosecution and convictions. In the future, all their tax affairs will be under the microscope so any damage will likely be lasting.
Make your policy clear
If the subject of tax avoidance comes up, make your policy clear. It’s important that clients are aware that tax affairs are their responsibility. However, it’s the responsibility of the accountant to steer them in the right direction by offering advice and warnings wherever necessary.
Be aware that any investigation could extend to you and your firm so you’re better off steering away from clients who want to go down the avoidance scheme route.