Can the Tax Industry be Self-Regulated?
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Tax Summative: Critically discuss the assertion that the tax industry cannot be trusted to regulate itself.
- Introduction, how is UK Tax Industry regulated? HMRC
- What ways have HMRC been successful?
- PwC scandal FOR Assertion
- Final Opinion
It is well known that tax advisory work within the UK is a legally unregulated profession, therefore in order to uphold high standards, the profession depends heavily upon self-regulation by the professional bodies. It is understood that the accounting profession is more prevalent than the legal profession within the market for large business tax advice in the UK. The efficacious tax advisory role of accountants in the UK may, to a certain extent, be explained by the sound working relationships that conventionally exist between the accountancy firms and HMRC, the UK tax authority. It can be argued that that strong relationships with the UK tax authority have corroborated the advising position of the UK accountancy profession.
The direct regulations of the tax advisory profession in the UK include a professional code of conduct that warrants professional conduct by incorporating aspects such as due care, integrity, confidentiality and objectivity, tax advisers who are affiliates of the CIOT (Chartered Institute of Taxation), ATT (Association of Taxation Technicians), or accountancy professional bodies are under obligation to follow this code. Consequently, affiliates who disregard the professional code may be scrutinised by the Taxation Disciplinary Board, which is an independent body established in 2001 by the CIOT and ATT. In addition, a percentage of tax advisers are bound by supplementary codes, for instance member firms of KPMG International practice a Global Code of Conduct which discloses the internal governance affairs of all KPMG firms. As a result of the investigations lead by the US Department of Justice into the US member firm of KPMG International with regard to the trade of tax shelters in the US between 1996 and 2002, KPMG UK (as of 2004) now apply the UK Principles of Tax Advice which summarises the governance operations of KPMG UK in relation to taxation. The unfavourable perception of the UK tax advisory profession has encouraged the implementation of professional codes by the UK tax advisory bodies that highlight a high level of societal accountability of the tax profession, going past perceptions that stick to the definition of the law.
Alongside direct regulations of the tax industry, indirect regulations of the tax advisory profession in the UK also exist. In spite of heated discussions in recent years, the UK Government has abstained from putting into effect legislation that would directly regulate the tax industry. However, UK policymakers have acknowledged tax avoidance schemes by introducing new legislation. Rules regarding the Disclosure of Tax Avoidance Schemes, or more commonly referred to as DOTAS, introduced new reporting obligations for both taxpayers as well as their advisors commencing from 2004. In addition, following detailed examination, the General Anti-Abuse Rule (GAAR) was implemented, in hopes of confronting abusive tax avoidance, the effects of which are yet to be seen as the legislation was only introduced in 2013.
Consequential to the investigations led by the Public Accounts Committee (PAC), a select committee of the British House of Commons, the success and usefulness of the tax industry being able to regulate itself has become an area of intense political dispute in the UK. The investigations were triggered by the leak of almost 28,000 documents, evidencing the involvement of over 1,000 business, demonstrated the promotion of Luxembourg-based tax-avoidance schemes by PwC. Margaret Hodge, Chairman of the PAC, deemed the actions of PwC to be the "promotion of tax avoidance on an industrial scale" and called for the UK Government to take the initiative to have a more active role regarding the regulation of the tax industry 'as it evidently cannot be trusted to regulate itself'. Members of Parliament demanded that the Government present a code of conduct for all tax advisers and proposed that submission to this code would govern whether or not companies delivering this service can attain both government and public sector jobs (House of Commons Public Accounts Committee 2013). In addition to this, the Public Accounts Committee demanded that the professional bodies take on a greater lead and be more accountable for their actions with regard to tax avoidance. It is apparent that tax advisers play a very large part of the global issue of tax dodging, the effect being that it costs developing countries billions of pounds annually. The Public Accounts Committee's 2013 report underlined the role that the Big 4 accounting firms play in tax avoidance as they generate billions of pounds a year as income from tax planning business in the UK alone, cash generated from worldwide clients is vastly greater. Tax Research UK director Richard Murphy claimed that accountancy firms are essentially the "back-bone" of the tax avoidance industry and that the act of tax avoidance would not be able to happen without accountancy firms as "they are the key suppliers of tax avoidance practices". The PAC now have reason to believe that large accounting firms have been advising their clients of different and more complex forms of tax avoidance, such as developing intricate business operating models that are not limited to a certain group of countries, which impose on the lowest international rates of taxation. In contempt of the evidence submitted by PwC negating the allegations, the PAC concluded that the tax schemes displayed all the "characteristics of a mass-marketed tax avoidance scheme".
However, there is still cause to debate whether PwC had genuinely done anything wrong other than legally reduce the tax liabilities of its clients. It is important to distinguish the difference between tax avoidance which involves planning affairs within the given framework of the tax legislation in an attempt to reduce tax liabilities, and tax evasion which involves refusing to pay tax liabilities by suppressing knowledge or information from HMRC, or by providing dishonest information.
Following the 10 year marker since HMRC was established from the merger of Inland Revenue and HM Customs and Excise, the ruling on the expanded division's relative success or failure credibly lies somewhere in between. The merger to create HMRC was intended to improve customer service, coordinate strategies and construct efficiencies through economies of scale. We can conclude that the latter point has clearly been a success, however the former point disputably less so.
D. de Widt, E. Mulligan, L. Oats Regulating Tax Advisers, FairTax WP-Series No.6, 2016